Economy Is On Hold

Companies appear to be curbing new spending, including some dividend increases, until the war is over

By Joseph Lisanti

News from the war front improved last week, and stocks gained some ground. But the economy is still dragging while consumers and corporations await the end of the struggle in Iraq.

Manufacturing activity, as measured by the Institute of Supply Management, contracted in March for the first time in five months. Consumer sentiment was weaker last month, and initial jobless claims jumped to 445,000 for the week ending Mar. 29.

The anxiety over the war has crimped corporate dividend increases as well. Although the number of dividend increases by the roughly 7,000 public companies reporting data to S&P rose 6% in this year's first quarter from the 431 posted in the same period in 2002, the trend softened as the quarter progressed.

January was a good month, with 197 dividend increases, but in March only 103 boosts were logged. That was the weakest March for increases since 1992. While March generally sees fewer dividend payment improvements than January, the 48% decline from the first month to the third this year is far greater than the 28% average drop seen over the last decade.

We suspect that the slowdown was caused, in part, by the realization that President Bush's plan to eliminate taxes on dividend income is likely to be scaled back significantly. But another factor may be that corporations are delaying dividend increases just as they are postponing other outlays, such as for new equipment and staff.

Unfavorable dividend actions (cuts and omissions), which always are far fewer than increases, numbered 10 in March, unchanged from the January level. Flat unfavorable actions would suggest that companies don't feel significant economic pressure to change dividend payments. For comparison, unfavorable actions in March exceeded the January level in six of the last 10 years.

We expect the market to rise once the war is over. Maybe dividends will rise too.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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