US companies are finally starting to spend some of the cash they’ve been sitting on, and that could mean a stronger economy and more jobs are on the way.
Industrial companies such as General Electric, Honeywell and Caterpillar have been posting strong financial results in recent weeks and telling investors that orders are strong. That means other large companies are investing in expensive equipment they need to grow their business, economists say.
“We’re on the brink of that inflection point where the economy can really take off,” says Diane Jaffee, a portfolio manager and managing director at the Trust Company of the West.
“What’s different now is that the industrial companies are saying there is real demand.”
In the years since the Great Recession, big manufacturers have cut costs, slimmed down their operations, and accumulated cash. They’ve had to because their customers – other big businesses – were too worried about some part of the global economy to hire people or buy equipment that takes years to pay off.
Political wrangling in the US shut down the government and led the country to nearly default on its debt – more than once – even as the US economy was struggling to improve. At the same time, the enormous European economy was mired in a debt crisis and a subsequent recession.
Now, finally, the economies of the US and Europe are showing steady progress, and while Chinese growth appears to be slowing, it remains strong.
“US gets a little bit better every day. Europe is improving. The growth markets continue to expand and will provide growth during the year even with volatility,” General Electric chief executive Jeff Immelt told investors recently.
GE’s results reflected that growth. Revenue from its existing industrial divisions rose eight per cent in the quarter, an extremely strong performance, led by a 12 per cent rise in equipment sales. And customers placed some large orders. For example, the South African rail company Transnet ordered 233 locomotives, valued at $US700 million ($A756.27 million), and Air France ordered $US1.7 billion worth of aircraft engines. That equipment will be manufactured in the US.
Caterpillar on Thursday reported that its first-quarter earnings rose five per cent and raised its forecast for profit for the year despite difficult times in the mining industry. Its sales to construction, energy and transportation companies improved and CEO Doug Oberhelman told investors the US economy looks promising.
Honeywell’s results were boosted by sales of turbochargers for car engines. It cited strong growth in the US, China, India and the Middle East as it raised its outlook for the year.
“Many companies are just more confident in the business climate this year than they were last year,” says Jim Russell, senior equity strategist at US Bank Wealth Management.
Concerns that the frigid northern winter would set the economy back have all but dissipated. It certainly hurt, but things seem to have snapped back quickly.
Jaffee, of Trust Company of the West, visited the Port of Albany last week to get some insight into how the economy was moving and said she was “shocked – in a positive way” to learn that the shipments so far this year were outpacing shipments from late last year, despite the cold temperatures.
The Commerce Department on Thursday reported that demand for core capital goods, considered a good guide for business investment plans, rose 2.2 per cent in March after a 1.1 per cent drop in February. It was the best showing since November.
Last year’s 30 per cent increase in the stock market made shareholders richer, but it didn’t help people find work or boost the wages of those who did have jobs. That’s because the increase was largely driven by monetary policy that made cash easy to come by and corporate cost-cutting, and not so much by fast-growing companies or a blossoming economy.
Economists don’t expect explosive global or corporate growth this year, either. But the improving big economies of the US and Europe will likely inspire companies to further increase spending on high-priced equipment. That kind of spending and hiring go hand-in-hand because both are needed to grow businesses. And it leads to even further economic growth as people with more permanent jobs and higher wages feel confident enough to spend money on their own big-ticket items, such as houses and cars.
“This year, the momentum shifts to Main Street,” said Russell. “The economy for real people will improve.”