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Archive for Friday, January 27, 2012

Businesses spend more, fire less as economy grows

January 27, 2012

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Businesses are growing more confident in the economy, investing in more equipment and laying off fewer workers.

Government figures on manufacturing and unemployment claims released Thursday raised hopes on the eve of a report on how much the economy grew in the October-December quarter.

Still, 2011 ended up as the worst year on record for new-home sales, a reminder that the economy has a long way to go.

“Business optimism seems to be picking up, which is critical to the growth and competitiveness of the U.S. economy over the long haul,” said Diane Swonk, chief economist at Mesirow Financial.

Orders for manufactured goods expected to last at least three years rose 3 percent last month, the Commerce Department said. And demand for goods that indicate business investment plans hit an all-time high.

A tax break that expired in December for large equipment purchases may have helped boost orders. Still, many economists said most companies are likely buying equipment simply because business is improving.

Manufacturers “have a real need to ramp up their spending on capital improvements ... because the economy is growing and industrial capacity has not kept up,” said Carl Riccadonna, an economist at Deutsche Bank.

That growth was evident after Caterpillar said its fourth-quarter profit jumped 60 percent. The world’s largest maker of construction and mining equipment also issued 2012 guidance above Wall Street predictions.

And 3M Co., which makes everything from Post-It Notes to Scotch tape, said sales in its industrial and transportation unit rose 14 percent in the fourth-quarter. The increase was driven by parts for cars and planes.

Factories are busier in large part because businesses are ordering more communication equipment, industrial machinery and autos. Economists pay close attention to demand for such core capital goods, which are considered a good proxy for business investment plans.

In December, orders for core capital goods rose to a record $68.9 billion. That’s more than 45 percent higher than the recession low hit in April 2009.

The increase offered some reassurance about the status of the recovery, especially after core capital goods fell in October and November. On Wednesday, the Federal Reserve cited the decline while warning that the economy remains vulnerable.

After seeing the government’s report, some economists said those concerns may have been premature.

“With big-ticket spending rising and the labor market firming, the economy is a lot better than some central bankers think,” said Joel Naroff, president of Naroff Economic Advisors.

Companies are also laying off fewer workers, which has some economists optimistic about job growth in January.

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