As the stock markets have performed poorly for two years, concern in the financial press has been focused on what the consumer will do. In reality, most of us lead a dual role, as business person and as consumer.
Gross Domestic Product (GDP) measures the total output of the U.S. economy. GDP is made up of about 70 percent consumer purchases, 13 percent business purchases and 17 percent government purchases. The current market cycle has been different in that it has been driven by a fall in capital spending (business spending), not in consumer spending. The least significant segment of GDP, business purchases, is the one that collapsed.
While consumer and government purchases grew over the past two years, business spending fell from 18 percent to 13 percent of the economy, a 28 percent drop. Our stock markets fell when the capital spending cycle went bust in early 2000.
Businesses quit buying servers and software from each other to link us all to the Internet. Telecom start-ups quit buying from the suppliers that provide hardware and software to provide the bandwidth, fiber and futuristic gear for the next big build-out in technology.
And when we reached 2000 and the world did not stop spinning, most businesses had already upgraded enough to allow them to forego purchases for two years. Capital spending on high-tech equipment went from growing at about a 12 percent annual rate from 1992 to 2000 to declining 15 percent in 2001.
Inventories fell to a six-year low as businesses lived off their stockpiles of goods before replenishment.
I am confident this cycle in the stock market is about to turn, based on the observation that business spending seems to have bottomed and the index of leading indicators, a government measure of future growth, has begun to rise. My opinion arises from the statistical evidence cited here, along with anecdotal evidence gathered from the business owners I advise.
As the spending in capital equipment increases, corporate earnings and outlooks will grow more optimistic and the economy and the stock markets will expand.
The key to the recovery of the coming market cycle is our behavior as consumers in the office, not at the mall. Look at your own business spending patterns and those of your buyers and suppliers. That data on capital spending will tell you when the stock markets will strengthen in this cycle.
Joseph Scarpo is chief executive officer of Bill Few Associates Inc. He can be reached at (724) 830-8800 or firstname.lastname@example.org.