Where Is Investment Headed?
Geraldine Gambale, Editor, Area Development Magazine (Oct/Nov 07)
You need to be an economic wizard to figure out where the U.S. economy is heading. How can some economists argue that the nation is on the brink of a recession when, according to the Commerce Department, the U.S. GDP grew nearly 4 percent in the third quarter - the strongest gain since the first quarter of 2006? The government says that unemployment is down to 4.7 percent and the core rate of inflation is less than 2 percent a year. So why did The Conference Board's third quarter Consumer Confidence Index fall to its lowest level since October 2005?
The mess in the mortgage industry is partially responsible for consumers' jitters and, despite price declines, housing sales are continuing to slide. And let's not forget rising gasoline prices, which rob consumers of discretionary income. Then again, analysts say Americans have continued to spend, with personal expenditures continuing to climb all throughout last summer. Are you keeping this all straight?
This economic instability is unnerving business executives as well as consumers. Only 63 percent of large and 76 percent of small manufacturing companies responding to a National Association of Manufacturers (NAM) third-quarter survey had a positive business outlook, representing the lowest level of optimism in roughly four years. Nonetheless, survey results indicate that both small and large manufacturers expect pricing to remain stable and sales to increase, albeit moderately, over the next 12 months. Both groups also expect to continue to increase capital expenditures, although there will be a significant slowdown. Large manufacturers' capital expenditures are projected to rise by only 0.3 percent, while smaller manufacturers' capital expenditures are expected to increase 1.6 percent. Both groups of survey respondents also expect to add jobs over the next 12 months, with employment increases at large companies being more modest (0.4 percent) than at smaller firms (1.6 percent).
Concerned about eroding confidence brought about by weakness in the housing market, surging oil prices, etc., on October 31 the Federal Reserve Bank cut its rate a quarter of a point to 4.5 percent in order to help keep the economy on track. However, it left the question of further rate cuts open, saying "recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation." So what will happen when the Fed meets again on December 11 is anyone's guess.
How can executives continue to plan in such an uncertain environment? Experts warn that being too cautious can actually kill growth, i.e., doomsayers can fall victim to a self-fulfilling prophecy. Thus, optimists should forge ahead. And those with new facility and expansion plans would be wise to keep on hand our 2008 Annual Directory. It contains basic data on the states and the names of some 3,500+ economic development contacts, with web and e-mail addresses of sponsoring organizations. It may help your company to navigate what lies beyond the current economic brink.