Animal spirits. That's the colorful phrase coined by John Maynard Keynes nearly 70 years ago to describe an essential ingredient of a robust economy: the willingness of business leaders to take risks. And it's what's largely been missing for the past couple of years. Stunned by the bursting of the '90s bubble, the ensuing recession, a slew of corporate scandals and, finally, the Iraq war, execs hunkered down and concentrated on cutting costs and conserving cash rather than building their businesses.
Now, at long last, their spirits are reviving. Surging profits and a soaring stock market have finally convinced many corporate leaders that the recovery is here to stay. Increasingly, worries about spending too much and getting ahead of demand are giving way to fears that if they don't act now, they risk missing out on the upswing. The shift has left execs across Corporate America scrambling to rebuild depleted inventories, upgrade outmoded factories, and even, in some cases, add capacity. Mergers and acquisitions are also taking off, as many position their firms for expansion. Even the long-stalled venture-capital market is reviving, as investors' appetite for risk returns.
The optimism is reaching the industries that plunged deepest into despair, such as battered manufacturing and overbuilt telecoms. Cingular Wireless has made a $30 billion preliminary offer for AT&T Wireless, and rival bids are possible, a sign that the industry's long-awaited consolidation appears to be getting under way. And on Jan. 8, Verizon Wireless announced a $1 billion upgrade to its network that will allow it to deliver wireless data at near-broadband speeds.
In response to the newfound buoyancy, economists are marking up their forecasts. An increasing number expects the Commerce Dept. to report on Jan. 30 that the economy grew at an annual rate of 5% or more in the fourth quarter, bolstered by higher investment and inventory restocking by businesses. Some think the torrid pace can be maintained through 2004. That would be good news for President Bush, heading into the November election. One worry, though, for both Bush and the economy: the lack so far of substantial job growth. If it continues, consumer spending could eventually be undermined.
ROSIER OUTLOOK. Still, there's little doubt that business investment is rumbling back to life. This is "the year when the IT industry will begin its next growth cycle," IBM (IBM ) Chief Financial Officer John R. Joyce told analysts on Jan. 15, after the company announced that net income from continuing operations increased 17% in the fourth quarter. Even in telecom, capital spending in 2004 is expected to rise 5%, to $58 billion, according to telecom equipment analyst Steven D. Levy of Lehman Brothers Inc. (LEH ) That's the first increase since 2000.
What's more, the nature of the spending is changing as CEOs grow more confident about the outlook. Much of the initial investment last year was concentrated on replacing outmoded computers and other high-tech equipment as executives remained wary about the economic outlook. But now, armed with new, expanded capital budgets for 2004, corporate chieftains are looking increasingly to upgrade plants and expand capacity to take advantage of the unfolding economic upturn. That's certainly the case at 3M Co. (MMM ), which is hiking its capital spending by a third this year, to nearly $900 million. Most of that money is going into new factories and increased output of hot-selling goods, including $100 million alone on ultrathin plastic films used in liquid crystal displays in everything from televisions to cellular phones.
After years of holding down capital spending to conserve cash, old-line manufacturing companies are starting to realize that they need to improve their operations if they want to stay competitive with their overseas rivals, says Dinesh Paliwal, President of ABB Inc, the U.S. subsidiary of the European engineering firm of the same name. "The mood changed in the fourth quarter. We started to feel a beat," says Paliwal, whose company makes and services big automation and robotics systems used in a lot of basic manufacturing.
Tech execs, too, report that their tightfisted customers more and more are venturing out of maintenance mode to invest in a select few information-technology projects. According to a Jan. 8 Citigroup Smith Barney (C ) report, 33% of IT spending in the next 12 months will go to new rather than existing projects. That's up from 23% in a similar study in September.
The upturn in corporate confidence also is showing up in the M&A market. U.S. companies announced deals worth $212 billion in the fourth quarter, more than double a year earlier, according to Thomson Financial (TOC ). In sheer numbers, the fourth quarter's 1,996 deals constituted the biggest tally since spring of 2001. Investors, too, are clearly warming to the trend. J.P. Morgan Chase's (JPM ) $59 billion takeover of Bank One (ONE ) was far better received by Wall Street than Bank of America Corp.'s. $49 billion deal for FleetBoston Financial Corp. in October. "We're seeing a return to confidence among CEOs," says Raymond J. McGuire, co-head of global mergers and acquisitions for Morgan Stanley (MWD ). "They have gone through prolonged cost-cutting and restructuring. Now they are beginning to think carefully about strategic deals."
Moreover, thanks to the surging stock market and booming profits, companies have the fat wallets they need for a shopping spree. Experts say the industries most ripe for future deals are finance, health care, pharmaceuticals, and media and telecommunications, all sectors in need of consolidation. J.P. Morgan's move, in part a reaction to BofA's earlier deal, is likely to spark a further wave of bank mergers. And however the likely bidding war for AT&T Wireless ends up, it too is likely to spur more deals.
Even Time Warner Inc. (TWX ), locked in crisis mode ever since the disastrous deal with America Online Inc. closed in 2001, may be back in the hunt. CEO Richard D. Parsons has suggested that the company might again be looking for acquisitions, now that the media giant is well ahead of its plan to reduce debt by $10 billion by the end of 2004. "You are definitely going to see an urge to merge," Parsons told BusinessWeek Online in late December. He hinted that one sector of interest to Time Warner is cable. One possible target: Cablevision Systems Corp. (CVC ) in Bethpage, N.Y., with its 3 million subscribers.
JOB JITTERS. To be sure, the growing corporate confidence has so far not translated into a spurt of hiring. That's a concern. If companies don't start to take on more workers and if the unemployment level stays high, there's a risk U.S. consumer spending could flag. If this occurs, the bump in business enthusiasm could prove short-lived.
Fortunately, though, there are signs many companies are getting ready to expand payrolls. Manufacturing, which has been hemorrhaging jobs since 2001, is showing signs of revival, the Institute of Supply Management reported on Jan. 2. "The mood shift is definitely there," says Norbert J. Ore, the Georgia-Pacific Corp. (GP ) procurement chief who oversees the institute's business survey. "People sense that the turn-around is happening." More broadly, the National Association for Business Economics said on Jan. 20 that more than a third of the companies it surveyed expect to boost payrolls in the next six months. "Job growth is right around the corner," agrees Paul J. Sarvadi, CEO of Administaff Inc. (ASF ), a Houston human resources and staffing firm. "Companies can only go so long with their business picking up before they have to hire."
The 2001 recession was out of the ordinary: Business led the downturn, while consumers kept the economy from plunging into the depths. And it has taken Corporate America an unusually long time to shake off its caution and see the prospects for recovery. But once the spirits are aroused, history shows, growth tends to beget more growth in a virtuous cycle. With profits soaring, capital spending booming, and M&A taking off, the U.S. economy seems poised for expansion for some time.
By Rich Miller
With David Henry and Steve Rosenbush in New York, Michael Arndt in Chicago, Ben Elgin in San Mateo, Calif., and bureau reports