Published January 29, 2013
Corporations are sitting on $1.7 trillion in cash, but are they ready to start spending? Not yet, says one top market strategist.
Russ Koesterich, global chief investment strategist for BlackRock (BLK), said concern about demand from U.S. consumers is holding back business investment. Companies are being more conservative with their cash because people aren’t spending money.
“We won’t see a big surge in business spending until we see a surge in consumer spending,” Koesterich said. “You can explain one-third of business investment by looking at personal consumption.”
Personal consumption expenditures -- a measure of household spending -- for the past two quarters came in below the long-term average of 3.4%, Koesterich said. Consumption expenditures rose 1.6% in the third quarter of 2012 and 1.5% in the second, according to the Bureau of Economic Analysis.
Businesses won’t make big capital purchases “until they feel better about the nation’s finances. Until we get a resolution on the budget issue, there’s still a prospect that taxes can change and have an impact to businesses directly or to consumers,” said Wells Fargo Senior Economist Mark Vitner.
He’s forecasting a 2% growth rate for capital spending in 2013.
The deal reached by Congress to avoid going over the fiscal cliff left the economy with a lot of fiscal drag and unanswered questions on the automatic spending cuts known as sequestration and the budget resolution to fund the government, Koesterich adds. “They avoided the nightmare scenario, but left CEOs and CFOs with too much uncertainty,” Koesterich said.
Smaller Paychecks and GDP
Koesterich sees the U.S. economy growing at 2% this year, with most of it in the second half of the year because of growing downside risks in the first quarter. Vitner’s outlook for economic growth is more grim: he’s forecasting a 1.7% GDP growth rate for 2013.
Both Vitner and Koesterich say smaller paychecks will be a headwind to growth in the first quarter. The two-year payroll tax holiday didn’t make the cliff deal and as a result, the tax paid by workers for Social Security rose to 6.2% from 4.2% on Jan. 1.
“Lack of real income growth, and Social Security taxes, may cost consumers to pull back in the first quarter. We’ll likely see it the soonest at places like restaurants, things people can easily cut back on,” says Vitner. (In 2011, median household income was $50,054, according to the Census Bureau. This was 1.5% lower than in 2010 and 8.1% less than in 2007-- a year before the recession.)
“It’s important to see how smaller paychecks and lack of a normal tailwind from tax refunds are changing both consumer attitude and behavior,” Koesterich said.