The Other Economic Cliff: Why Business Investment Is Really Nose-Diving
The Home Economy is strong. It's the Away Economy that has problems.
The American consumer is the most optimistic s/he's been since before the Obama presidency. Meanwhile, large U.S. companies are cutting spending at the fastest pace since the Great Recession.
Who's right about where we're heading, the pessimists or the optimists? Both.
For the moment, imagine two American economies: the Home Economy and the Away Economy. In the Home Economy, there is mostly good news to report, so long as Washington doesn't screw it up. GDP growth and job growth have been steady, if slow, for more than three years. Consumer spending is healthy. Housing indicators are turning up all over the place, like home prices, starts, and construction employment. It's all adding up to the possibility of accelerating job growth and a recovery worthy of its name in 2013. Small businesses, which rely less on world markets and more on the animal spirits of their neighborhood, is still higher than it was for most of 2011.
Meanwhile in the Away Economy, there is a world of precarious, scary, and outright depressing news, which is weighing on large corporations that tend to make more than half of their income from customers outside the United States. GE and Pfizer, for example, are listed in U.S. stock indices. When their prices fall, it looks like a reflection of the U.S. economy. But both companies make more than 50% of their revenue abroad. Apple makes more than 60% outside the Americas. When the world catches a cold, multinationals sneeze ... even if the typical U.S. household is feeling healthier.
Today's bad news fits mostly, but not entirely, into three buckets: (1) Demand from Europe, which is a continent-wide recession that could turn into a continental depression; (2) Demand from China, which could slow as it re-balances its economy toward household spending and away from government investment; (3) The fall in commodity/energy prices, which is a combination of secular trends, like plentiful natural gas, and a perceived slowdown in energy-intensive economies (namely Europe and China).
(Yes, there is also the issue of the fiscal [topography metaphor here], which is raising uncertainty and stress on Wall Street, but also will almost certainly be resolved in a way that doesn't dramatically change taxing and spending levels in 2013. Meanwhile, there is still the fact that equipment, software, and construction investment has been declining among major corporations for the last four quarters.)
In the real world, the home and away economies aren't entirely separable. When worldwide copper prices go up, and Caterpillar receives orders for more earth-digging machines for Peru, they'll hire more workers in their Milwaukee plant, who will spend more on local dry-cleaning and coffee, boosting businesses whose work has nothing to do with copper. These aren't two distinct economies, so much as two halves of the same global machine.
But it's important to distinguish between home and away when you're making sweeping statements about the U.S. economy as if it's a single body fighting a single cold. The swooning stock market of the past few weeks is not a sign that we're veering toward a double-dip. Instead, it's a reflection of a global investment market made queasy by a steady drumbeat of bad news from around the globe. Here at home, the news is good enough that some resilience from multinationals with some deal-making from Washington should manufacture a strong 2013 economy here at home.
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