Business Executives Are Growing Optimistic Again

John Maynard Keynes used the phrase "animal spirits" in 1936 to highlight the role confidence plays in the economy. He saw how investors and businesspeople must go with their guts in uncertain times and put their money to work if the economy is to grow and the nation to prosper. Judging by the recent surge in the stock market, animal spirits are certainly back on Wall Street. Undeterred by worries a bubble may be building, investors have piled into equities, pushing the Standard & Poor's (MHP) 500-stock index up about 60% since March.

In the executive suites of Corporate America, however, confidence has been slower to return. Shell-shocked by the worst recession since the 1930s, company chieftains have been focusing on survival rather than expansion. That caution has held the economy back as businesses have kept tight control over hiring and spending.

Now, though, the gloom looks to be lifting. That should give legs to the recovery and reduce the risk of a relapse into recession next year as stepped-up business spending offsets the fading impact of the $787 billion federal stimulus plan.

Behind the revival: a pickup in profits. Earnings surged 11% in the third quarter from the second, the most in five years. Sure, most of that gain came from much-improved results in the banking industry. But even after stripping out financials, U.S. domestic profits eked out a 2% gain.

Even better times may lie ahead. More than two-thirds of corporate execs surveyed in November by the Business Roundtable expect their company's sales to increase over the next six months. And the Roundtable's CEO Economic Outlook Survey Index—designed to take the temperature of its 160 member corporations—rose to its highest level in more than a year in the fourth quarter.

More telling than what company bosses are saying is what they're doing. Rather than focusing solely on cost-cutting, executives are preparing for growth by looking to hire workers, add to inventory, and build capacity.

Employers pared payrolls by just 11,000 last month, the smallest reduction since the recession began in December 2007. The breadth of the declines narrowed as well, with the fewest industries since May 2008 saying they had cut workers. And companies added to the hours of existing employees and took on temporary workers, steps that usually presage the hiring of permanent, full-time staff.

A survey by Manpower (MAN), the world's second-largest provider of temporary workers, finds that employers plan to increase payrolls for the first time in a year during the first quarter of 2010. Seven of the 10 industries polled, including retailers and business services, expect to take on new workers.

Companies also may be starting to raise inventories so as not to lose out on sales. Stockpiles at factories and wholesalers rose for the first time in 14 months in October. While some of the gain at plants was due to a rise in the price of petroleum inventories, stocks of many other goods, from aluminum to automobiles, also increased.

A shift in stockpiling strategy would be significant. Companies must cut production to trim inventories. Businesses have slashed inventory nearly 7% since the end of 2007, more than the 3.7% fall in gross domestic product during the recession. If companies are finally turning from reducing to rebuilding stockpiles, that could goose growth well into 2010.

Business spending on equipment and software is another piece of the growth puzzle beginning to fall into place. During the second quarter, such outlays added to GDP for the first time in a year and half. And 40% of CEOs surveyed by the Roundtable expect their capital spending to grow over the next six months; only 16% see declines.

Of course, not all is copasetic for companies. Small businesses, depressed by falling profits and slow sales, saw their confidence hit a four-month low in November. And even their larger brethren don't see a barn-burner of a recovery. Executives told the Roundtable that they expect the U.S. economy to grow just 1.9% in 2010. That's not much of an upswing, but it sure beats a double dip back into recession.

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