Increased spending gives rise to optimism on recovery

Economists are revising forecasts and predicting a stronger economic recovery as a result of surging profits.

Surging profits are prompting economists to revise their estimates for growth, tilting the recovery more in the direction of a V-shape as businesses from Intel Corp. to JPMorgan Chase & Co. boost spending.

“Companies have a lot more capital, and they’re going to deploy it for equipment and hiring rather than sit on it, said Joseph LaVorgna, chief U.S. economist in New York at Deutsche Bank Securities Inc. ‘‘It’s quite possible the economy produces a recovery significantly stronger than people anticipate.”

The U.S. will grow 4 percent this year, he said. While that’s slower than the V-shaped recovery in 1984, when the economy expanded 7.2 percent after the 1981-82 recession, it’s faster than the 3 percent median estimate of 59 economists surveyed in April by Bloomberg News.

Barclays Capital, a unit of London-based Barclays Plc, raised its forecast for growth this year to 3.8 percent from 3.5 percent on April 16, while UBS Securities, a unit of UBS AG in Zurich, increased its prediction to 3.3 percent from 3 percent on April 9. The economy contracted 2.4 percent in 2009.

Intel, the world’s biggest chipmaker, said on April 13 it lifted its projection for outlays on research, development, mergers and acquisitions this year by $600 million to about $12.4 billion. JPMorgan Chase, the second-largest U.S. bank by assets, plans to hire almost 9,000 employees in America, it said the next day.

Relapse Less Likely

The odds that the U.S. will relapse into recession have fallen to 15 percent from 25 percent at the start of year, thanks in part to rising profits, said Mark Zandi, chief economist at Moody’s in West Chester, Pennsylvania. Earnings for the companies in the Standard & Poor’s 500 Index more than doubled in the fourth quarter, in what LaVorgna described as a “V-shaped recovery in profits.”

The expansion will feed back into corporate earnings and pave the way for a further rally in the stock market, LaVorgna said. The S&P 500 has risen 76 percent to 1,192.13 on April 16 from the March 9, 2009, recession low, and he sees it hitting 1,325 by year-end.

“We’re looking at an extremely broad bull market,” Edward Yardeni, president of Yardeni Research Inc. in Great Neck, New York, said in an April 12 interview on Bloomberg Radio with Tom Keene.

Earnings for S&P 500 companies probably rose 30 percent in the three months through March, according to analysts’ estimates compiled by Bloomberg. That would be the first back-to-back quarterly gain since 2007.

Record High

While corporate profits are still below their pre-recession peak, earnings per worker -- at $13,698 in the fourth quarter of 2009 -- are rising toward the record high of $14,477 reached in the third quarter of 2006, according to Deutsche Bank estimates based on government data.

The surge in profits has left companies with a surfeit of cash. Liquid assets at nonfinancial, nonfarm businesses rose to a record $1.8 trillion at the end of last year from $1.48 trillion at the end of 2008, according to the Federal Reserve.

“Businesses, broadly speaking, have the financial firepower to go out and invest and hire,” Zandi said.

They’re coming under pressure to put some of their earnings to work. Forty-three percent of global investors want companies to use cash flow to increase capital spending, the highest since June 2006, according to the April BofA Merrill Lynch Survey of Fund Managers. The investors polled collectively manage about $546 billion.

Corporate chieftains are responding. Forty-seven percent of executives plan to spend more during the next six months, while only 7 percent expect to reduce expenditures, according to the Business Roundtable’s CEO Economic Outlook Survey released on April 7. The balance anticipated no change.

Aging Computers

Intel is “seeing signs of corporate demand returning, which we believe will continue to improve, given the age of the corporate PC fleet,” Paul Otellini, president and chief executive officer of the Santa Clara, California-based company, said in an April 13 conference call with analysts.

“The average fleet of desktops is five years old,” he elaborated during the call. As chief information officers “are feeling a bit better about their business, it makes economic sense to swap these out.”

Production of business equipment rose 1.4 percent in March from February, the fourth consecutive monthly gain, reflecting rising demand for computers, communications equipment and semiconductors, Federal Reserve figures showed on April 15.

‘Source of Strength’

Spending on equipment and software “has the potential to be a source of strength for the economy” because companies ran down their capital stock so much during the recession, Fed Vice Chairman Donald Kohn, who’s resigning from the central bank in June, said in an April 8 speech in San Francisco.

Talbots Inc., a U.S. clothing chain based in Hingham, Massachusetts, plans to double its capital expenditures to $40 million this year from 2009, Chief Financial Officer Michael Scarpa told analysts during an April 13 conference call.

“The majority of this increase will be allocated to refreshing and renovating our stores,” as well as information- technology initiatives, said Scarpa, who is also chief operating officer.

Companies are also starting to put their earnings to work by adding to payrolls after shedding 8.3 million workers since the end of 2007. Private-sector employment rose by 123,000 in March, the third consecutive increase and the biggest since May 2007, according to the Labor Department.

Intel, which saw first-quarter profit almost quadruple to $2.44 billion, plans to add 1,000 to 2,000 new workers this year, spokesman Tom Beermann said April 14 in response to a question. It has 79,500 employees, down from 82,500 a year ago.

‘Ramp Up Hiring’

“Businesses are basically understaffed, so they’ll ramp up hiring as demand increases,” said John Herrmann, senior fixed- income strategist at State Street Global Markets LLC in Boston.

JPMorgan Chase, based in New York, announced the planned addition to its U.S. workforce after reporting a 55 percent rise in first-quarter profits to $3.33 billion.

CSX Corp., the third-largest U.S. railroad, is hiring more workers and calling back some furloughed employees as its business expands, Chief Operating Officer David Brown said told analysts on an April 14 call with analysts. Its net income jumped 24 percent in the first quarter to $306 million, the Jacksonville, Florida-based carrier said.

Twenty-nine percent of 105 executives who responded to the Business Roundtable survey plan to increase hiring during the next six months, while 21 percent anticipate reducing payrolls. That was the first time since the first quarter of 2008 that more companies forecast higher employment than lower employment in the survey by the Washington-based association of leading U.S. companies with more than 12 million employees.

Small-Business Caution

Small businesses are more cautious. They’re not ready to add workers, though they’ve basically stopped paring payrolls, according to a March survey released on April 13 by the National Federation of Independent Business in Washington.

Job gains this year are likely to be gradual, averaging about 100,000 a month, before ramping up to double that in 2011, Zandi said. Many small companies are still having trouble getting credit and remain wary about expanding their operations, he added.

Unemployment will drop to 9.4 percent in the fourth quarter of this year from 9.7 percent now, according to the median forecast of 59 economists surveyed by Bloomberg News this month.

Former Fed Vice Chairman Alan Blinder made the case for optimism on the economy back in December, when he forecast growth of 3 percent to 4 percent this year and argued against a jobless recovery in a Wall Street Journal opinion piece.

Source: Bloomberg News