Global Outlook

Corporate Spending and Unemployment

Contributed by eResearch

By Bob Wier

Numerous investment articles over the past few months have implored America’s corporations to unleash their vast, burgeoning cash hoards to kickstart the economy. This may now be occurring and, if so, could provide the catalyst for a winning stock market in 2012, at least in the United States.

A Federal Reserve report released in September 2011 stated that, at the end of June, U.S. non-financial corporations held more than $2 trillion in cash, and that excludes foreign cash holdings. This comprised 7.1% of all company assets, and was the highest level since 1963.

The subsequent quarter, ending October, saw a decided increase in corporate capital spending, which reached the highest level since 2008. This shift, with increased expenditure to upgrade property, plant, and equipment, likely marked the collective executive viewpoint that the U.S. economy will avert recession. While weak capital spending probably has been the major reason that U.S. unemployment remained stubbornly high through 2010-2011, the increased capital spending in Q3 may be responsible for the notable drop in U.S. unemployment in the last two months.

The potential for a significant increase in the capex cycle is evident. Should there be an increase in global financial stability and continuing signs of a stronger U.S. economy, capital spending could mushroom, unemployment would fall, and stocks would reap the benefit.