Still Different, but Showing Signs of Life

We’ve been fond of noting how different this economic cycle of recession and recovery has been. These discrepancies are particularly acute when comparing employment and productivity to prior cycles. We can add another factor to the list of historical differences: lackluster manufacturing activity. Now, we may be seeing signs of that sector finally waking up. The U.S. economy is showing “nascent signs of recovery in the manufacturing sector,” noted yesterday’s Fed Beige book. Add to that today’s 2Q Real GDP growth improving 2.4% (annual rate), with Capital spending up 6.9% (seasonally adjusted annual rate).

Is this the long awaited proof that the ailing manufacturing sector has finally begun to improve? It would be a welcome change. As the nearby chart illustrates, 18 months after the official end of the recession, Industrial Production remains anemic. Even the Fed noted “on balance, capital expenditures in the manufacturing sector remained weak.”

Any uptick in corporate spending is crucial to a sustainable recovery. It’s been quite apparent that the corporate sector, vis a vis the consumer and the government, has simply not been pulling its weight. The Feds have spending money as fast as they can, racking up record deficits in the process. Only the most vehement anti-Keynesian would object to deficit spending at this stage of the recovery. And, the Consumer continues to do their share, spending profligately, regardless of their ever increasing debt load.

What stands between us and a full-throated economic recovery is the legions of tight fisted corporate IT managers, CFOs, and budget committees who stubbornly refuse to believe their own CEO’s happy talk. Once these Scrooges start spreading their love, we expect consumer confidence to rise, employment to markedly improve, and tax receipts to climb. But they have to be willing to break open the “lock box” and start hiring and spending.

Those that do so may ultimately be rewarded. As Business Week recently noted, “a few gutsy companies think now is the time to grow.” Specifically mentioned were Washington Mutual, Intel, Verizon, Apple and Logitech as examples of firms “boosting spending on capital investments, research and development, and marketing. They’re breaking into new markets, launching new products, and starting to think about deals. They’re making acquisitions. They’re even hiring . . .” Unfortunately, these firms are in the minority.

Sure, there is still too much excess capacity, little end user demand, and extremely limited pricing power. But sometimes, you just have to take one for the team.

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