Wednesday, November 26, 2008

Corporations are extremely cautious

Corporations pulled back on their capital spending plans last month, as the second chart shows, and consumers pulled back on their spending. That's hardly news, since I don't know anyone who isn't more cautious these days about non-essential spending. What stands out however, is that capital goods orders today are at the same level they were at as we entered the last recession, yet corporate profits, as the first chart shows, have more than doubled since then. Corporations have therefore amassed a huge store of cash in recent years.

Given the proper incentives (e.g., lower tax rates, accelerated depreciation allowances) and an improvement in confidence, we could see a burst of new investment in the coming years that could easily pull this economy out of its slump. There's a lot more money sitting in corporate coffers than Obama could possibly muster for his fiscal stimulus plan, and corporations could put it to work a lot faster than government bureaucrats could. Memo to Obama: don't limit your stimulus plan to government spending.

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