Good sign: Business spending up

WASHINGTON – Nov. 6, 2009 – A turnaround in business spending is offering the first hint that the private sector may be prepared to drive economic growth when the government winds down its efforts to spur consumption.

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After six consecutive quarters in retreat, businesses in the third quarter increased spending on new computers and software at an annual rate of 1.1 percent. That marked an about-face from the first quarter’s annualized 36.4 percent plunge.

“That is a sign of the private sector getting some confidence back and starting to rebuild the capital stock,” Christina Romer, who chairs the president’s Council of Economic Advisers, told reporters.

The Commerce Department said that the economy expanded at an annual rate of 3.5 percent in the third quarter, marking an apparent end to the most punishing recession since World War II.

Indications that business spending is starting to revive are vital to future growth – because there is no political support for the government to indefinitely prop up the economy. Romer, however, said she sees little danger of renewed recession next year.

“I think we’re going to be fine. My anticipation is we’re going to sort of grow moderately. ... We’re going to have to see if the private sector comes back,” she said.

The economy was propelled by incentives for consumers to buy homes and cars, among a series of extraordinary interventions by Washington in the market. But federal pump-priming won’t last forever. The cash-for-clunkers program, which goosed auto sales, has expired.

Likewise, although roughly half of the $787 billion stimulus remains to be spent, its biggest impact on growth occurred around midyear.

The government initiatives were designed to stabilize the economy until private companies could rebound from last year’s financial crunch. With credit still tight – especially for small businesses – there have been few signs of such rebirth.

Now, resurgent equipment spending may signal that the private sector is beginning to stir, Romer said. Business spending on equipment and software peaked at $1.1 trillion in the fourth quarter of 2007 before shrinking by more than 21 percent amid the global downturn.

Even after the recent uptick, business spending of $879 billion is only at 2001’s level. Companies haven’t even been keeping up with depreciation, says economist David Hensley of JPMorgan Chase in New York. “The capital stock is declining for the first time in decades,” he said.

Hensley expects capital spending to continue rising, although the credit squeeze on small businesses could be an obstacle.

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