Evidence of a turn in the business cycle has been met with almost bewildered disbelief by many American executives. The evidence has been rolling in: profits are rising strongly; investment by non-farm, non-financial corporations has expanded briskly for two quarters in a row; and corporate spending on computers and software is growing as rapidly as it did at the peak of the high-tech boom.
Multi-billion-dollar mergers are back. General Electric is paying £5.7 billion ($9.5 billion) for Amersham, a British life-sciences firm; and Bank of America is purchasing FleetBoston, a rival American bank, for $47 billion. Both deals are aimed at boosting future growth. In addition, an initial public offering (IPO) planned next year for Google, a search-engine firm, could turn into the biggest dotcom flotation ever. Even payrolls have begun to expand again: the economy added 126,000 jobs in October, the sharpest growth in nine months.
Yet many American businessmen, who just a few years ago were breezily predicting an almost eternal growth in profits, still seem strangely unable to rouse themselves from the torpor of recession. Last year, Jack Welch, the former boss of General Electric, warned of too much “hunkering down” in the boardroom, and there is evidence that the hunkering continues. On November 5th, John Chambers, the once-exuberant head of Cisco, a high-tech giant that makes switches to direct traffic around the internet, reported a 76% jump in his firm’s profits. But, he said, this inspired in him only an “increasing but very cautious business optimism”. Half his friends at the head of other companies tell him that things are looking better, he said. The others are not so sure.
Reasons to Be Cheerless
What is it they are not so sure about? To some extent, they are still trying to recover from the slew of scandals in 2001 and 2002 that weakened the bond of trust between companies and investors. In its wake, prosecutors, regulators and politicians rewrote the rules of behaviour for the chief executive. But the diktats of the Sarbanes-Oxley act, the main vehicle of that process, are now firmly in place in most companies, freeing them to shift from navel-gazing to viewing the outside world.
Others can scarcely believe their financial good fortune, and wonder how long the fiscal and monetary stimulus that has so boosted the economy can last. Steven Galbraith, an analyst at Morgan Stanley, reckons that falling tax rates have been one of the least-appreciated factors behind the rise in corporate profits in recent years. But how long can the burden of corporate taxes continue to fall, ask the doubting Thomases, and how long can interest rates stay so low?
Bill Gross, an influential bond-fund manager, worries that American firms are generating an unusually large share of their profits from financial bets that depend on interest rates remaining low. Although rates have risen sharply since the middle of the year, long-term rates have softened somewhat recently, prompting fears that the business recovery (which should raise demand for capital, and hence push up interest rates) remains unusually subdued.