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5 stocks for the next spending surge
With consumers tapped, business spending will have to keep the economy moving. And these companies are best positioned to benefit.
By Jim Jubak
Can you hear the worry? Suddenly the economy is sounding a few sour notes about growth in 2006.
And the increasingly important question is "Will business spending be strong enough to keep the economy growing at 3% or better in 2006?
On Tuesday, the Federal Reserve sounded as clear a note of concern about economic growth as it ever sounds about anything. In the statement issued by the Federal Open Market Committee announcing the latest one-quarter percentage point increase in short-term interest rates, the committee said, "Although recent economic data have been uneven, the expansion in economic activity appears solid."
That's a decidedly more qualified vote of confidence than the committee issued after its Dec. 13 meeting: "Despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appears solid."
The difference is a single report on GDP growth issued on Jan. 27. Economic growth in the fourth quarter of 2005 was just 1.1%, the U.S. Commerce Department reported. That was well below forecasts of 2.8% growth and way, way below the 4.1% average growth in the previous 10 quarters.
Consumers take a breather
One reason for the slow growth: a big slowdown in the growth of consumer spending to 1.1%, a four-year low. That had been expected by economists, however. Higher energy prices and higher interest rates on home mortgages have damped the flow of money going into consumers' pockets from mortgage refinancings and home equity loans. And that, economists and the Federal Reserve have been predicting for months, would eventually reduce the growth rate of consumer spending. "Eventually" may have arrived with the December quarter.
But another cause for the lower-than-expected growth in the quarter wasn't expected. Business investment grew by just 2.8% in the quarter. That's less than a third of the growth rate over the last two-and-a-half years.
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That lower-than-expected growth is a big deal because those who believe the economy can keep on growing at better than 3% in 2006 have been counting on business spending to pick up the slack. The argument sounded logical: U.S. capital spending bottomed in 2003, after the bursting of the technology bubble in 2000 -- and has been on the rebound ever since. In the four quarters prior to the fourth quarter of 2005, growth in business spending averaged 8.4% a quarter.
And, the argument went on, growth in business spending certainly hasn't topped out. In fact, according to Morgan Stanley, growth in business spending in this recovery is only about 75% of the average in a recovery. In many industries, investment has lagged for years or even decades -- in mining, for example -- leaving a pent-up need for more investment. That, the pro-growth camp argued, would be enough to keep growth rates high.
Hey, big spenders
I think that argument still has a lot going for it -- in spite of the fourth-quarter numbers, which are, remember, just the initial read on growth for the quarter and subject to substantial revision. The biggest drop in business spending was for transportation equipment -- and since purchases in this sector tend to be big and lumpy, the drop may just be a timing issue. Boeing (BA, news, msgs), the biggest single contributor to this category, has reported shipments in the first quarter of 2006 that make a bounce back in business-spending growth likely.
The most likely scenario for 2006 is still a slowdown from the 4% growth rate of recent quarters as consumer spending does slow. Consumer spending makes up about 70% of GDP and business spending is just 17%, so even a big jump in business spending probably wouldn't be enough to prevent the economy from showing some slowdown. (Consumer spending itself may not have slowed as much as the December quarter numbers indicate: A big drop in auto sales drove down the results for the quarter, but sales now seem to have leveled off.) But a lower economic growth rate wouldn't be anything out of the ordinary for an economic expansion now more than four years old.
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