11/9/2011 6:12 PM ET|
5 companies growing the economy
Amid all the bad news and despite hard times for many, economic growth was stronger in the third quarter than most expected. Companies like IBM, Oracle and Starbucks help explain why.
It's easy to forget, with all the attention lavished on Europe's debt crisis and our own, that the U.S. economy is actually humming along at a nice clip.
In the third quarter, a period marred by the debt-ceiling debate, the loss of America's AAA credit rating and a whole lot of stock market volatility, the gross domestic product expanded at a 2.5% annual rate.
If you correct for a drawdown of inventories and focus just on domestic purchases, growth came in at an impressive 4.1% -- the second-best quarterly result since the recession ended. In the process, the economy swelled beyond its old 2007 pre-recession peak. That's the line between "recovery" and "expansion."
Yet most Americans remain convinced the "recession" never ended.
Clearly, the spoils have gone to the corporate sector this time around. Business profits keep hitting record highs as companies sit on trillions of dollars in cash reserves rather than hire or build. Wages at the top end have soared; the rest have lost ground. Working Americans (and those looking for work) are getting little help from Wall Street or the government.
But there are a number of companies growing themselves and the economy in very positive ways; I'm taking a look at five of them this week. They represent attractive opportunities for long-term investors, and they represent the two healthiest areas of our economy -- the areas creating jobs.
Before we get to them, let me explain why I think we should be cheering the corporate sector instead of jeering it. And why the two new areas of growth they represent -- business investment and high-end retail -- will replace exports as the main driver of growth going forward, should the trend continue.
Cheers, not jeers
A lot of you will dismiss the idea that the economy is rebounding. It doesn't feel like it. Nor does it feel like the upside businesses are enjoying is being shared. The broad measure of unemployment stands at 16.2%. Factoring out government payments like unemployment benefits and Social Security, household incomes have recouped only one-third of their recession losses.
This disparity in fortunes, and the questionable connection between the government and corporate lobbyists, is fueling the Occupy Wall Street movement.
According to Morgan Stanley analyst Gerard Minack, that's because "aggressive government stimulus meant that the corporate sector did not have to 'pay' for the recovery." But workers and their salaries were squeezed by the ongoing pressures on the labor market from technological advances and competition from cheap foreign labor.
A big increase in demand for exports, which allowed U.S. companies to sell to fast-growing markets like China, contributed to the business rebound as well. In fact, exports have been one of the few bright spots during the recovery. While the economy is still 2.2% smaller than it should be, based on the average of the five most-recent recoveries, the growth contribution from exports is running 0.7% of GDP above average. That's been a boon to export-oriented companies like Caterpillar (CAT, news).
As terrible as the situation is for so many, with head winds hitting the economy anew (the looming deadline for congressional supercommittee budget cuts and the mess in Europe), we need for the corporate sector to remain strong to keep the economic expansion going. This is especially true considering the government's budget woes. Growth will lower the deficit.
Yet, there's trouble ahead: While third-quarter earnings have been solid, profit margins are beginning to narrow. The eurozone and parts of Asia are stumbling back into recession. And Minack believes that while earnings have bounced back strongly as the economy rebounded, they could very well collapse in even a mild recession.
In other words, the economy's one pillar of support, corporate strength, is looking newly vulnerable. Let's hope that companies like these five, which operate in the two most-robust areas of the economy, can keep things going.
Businesses get back to tech
I've written before about how a lack of investment by corporate America, even for basic maintenance of existing equipment and machinery, was causing the productive capacity of the country to shrink at a record pace. CEOs were paralyzed by fear and obsessed with cost cutting to hit their quarterly profit targets. Far more jobs were cut than the recession justified. And capital investment fell by more than twice the historical average, given the depth of the recession.
But that's changing. As you can see in the chart above, U.S. manufacturing capacity is starting to rise again as factories respond to growth by adding new machinery and equipment. This domestic demand, driven by a need to make up for lost time and revamp production lines, is why final sales to domestic purchasers jumped 4.1% annualized last quarter.
Drilling into the numbers, fixed, nonresidential investment (essentially, capital spending by businesses) jumped at a 16.3% annualized rate, building on the 10.3% jump in the second quarter. Spending on equipment and software was the main driver.
This comes as no surprise to Credit Suisse equity strategist Andrew Garthwaite, who turned bullish on business spending -- software in particular -- in late July. While some of the cream has been taken off the top, as it were, the situation still looks very good, despite a recent Credit Suisse executive survey in which 40% of respondents indicated they will cut spending in the next six months.
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"Far more jobs were cut than the recession justified."
True, true, and true. I got so sick and tired of hearing the 'economy' excuse for companies laying off workers. It simply became a convenient, and acceptable, excuse to cut expenses and line their own pockets with the left overs. I use to never believe this sort of behavoir existed; but while the average person cuts back to make ends meet; banks, oil companies, (fill in the blank here), just raised prices or fees to continue their lifestyle.
IBM??? The only economy they are growing is in India. At the rate they export jobs we’ll all be living in tents earning a competitive 3rd world wage. Do they pass the discounted payroll costs to their customer? Heck no!! Talk about corporate greed. IBM I=India B=Business M=model.
I buy Starbucks coffee, not for the fancy frou frou drinks and not everyday. Saying it only costs 5 cents points to exactly why I seek them out. Starbucks puts some coffee in their coffee. Plus they provide decent benefits for their employees, and a fairer price for their growers. It costs them far more than 5 cents. As far as "growing" the economy, there is a manufacturing plant near Cincinnati, Ohio. One of the things they make is rubber floor mats for Starbucks. Go drink your barely brown, flavorless, heated up ditchwater. Be happy with that. Quit bashing a company that has managed to be successful and fair at the same time
A lot of you will dismiss the idea that the economy is rebounding
If you truly believe the economy is on the mend, you ought to be recommending equities or quality corporate bonds. Yet, a few days ago you just recommended investors to stay out equities and hoard cash. Not to get into a semantic argument but it seems to me like a contradiction.
Since everything moves forward in cycles, next time you make a prediction/recommendation why don’t you clarify your timeline or the events that will reverse your prediction/recommendation? If you don’t do that, you are just saying that the markets oscillate which is not saying much.
I’ll show you what I mean with an example: my prediction for the S&P500 for the next 3 years is that it will stay in a trading range between 800 and 1,350. Many of us will never see again the 1550 peak reached in March 2000 in spite of the incoming inflation. Many of us will never see again real employment above 90% unless there is another global war and the US wins it. 3 years, never… this is how one stakes his predictive reputation.
In my opinion you are out-of-touch with mainstream America sir! To state such facts as your article indicates to me, is a denial or plain ignorance of the REAL facts in this economy. Apparently you are not hurting as millions of your countrymen are and this has set blinders around your fact-finding focus!! Re-evaluate sir in an objective manner and then feel free to write an all-inclusive article with fresh and ACCURATE facts!
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