Business Investment on the Rise While Other Economic Factors Falter
Business investing is an isolated stimulation in a slow-to-recover economy. Capital Economics reported in its quarterly US Economic Outlook that business investment increased 17%, dwarfing the 1.6% gain in consumption. Although most investments were in made in equipment and software -- things Capital Economics considers temporary investment boosts -- the research firm noted that commercial real estate rebounded modestly, ending a severe contraction in the market over the past couple of years. The report said the recent rise in debt-to-worth ratio leaves firms looking leveraged and means that as internal funds rise, income gearing on that debt is falling. Firms are mostly investing in the bond market, but commercial paper issuance is also going up, the report said, and bank loans are close to leveling out. Capital Economics said that fiscal stimulus should continue to to provide a boost to public construction spending through the end of 2010, thus growing the commercial sector (see chart). Managing director at NewOak Capital, Mark Ruh, believes that business investing in times of sputtering economic recovery provides a positive additive. He's specifically enthralled by northeastern financial firm First Financial Niagara's (FNFG) plan to purchase NewAlliance Bank's (NAL) holding company NewAlliance Bancshares Inc., a deal that with cost the former $1.5bn and represent a tangible book of 163%. “This is the first real open-bank acquisition in two years,and happened because acquirers can now trust the better balance sheets in the industry," Ruh said. "This transaction should mark the beginning of a robust bank M&A market over the next several years." Aside from the uplifting side of the economic outlook, Capital Economics predicts GDP growth to slow to around 2% from 2.7% in both 2011 and 2012. The firm found that consumption has depleted to less than half the average annualized rate, down to 1.6% from 4% and unemployment is expected to stick above 9% until at least 2013. Write to Christine Ricciardi.