Cheapskate CEOs could hurt growth

NEW YORK (CNNMoney.com) -- Maybe what the economy has to fear most isn't the bang of a housing collapse or a market meltdown, but rather the whimper of sluggish business spending.

The latest economic numbers have brought one thing into clear focus - that businesses are growing more cautious and pulling back on spending as the expansion gets set to enter its sixth year. But if businesses hedge their bets and don't invest enough, that could hobble economic growth for much of 2007, some experts said.

"Everyone had been worried about the consumer and the weakening housing market, so they were looking for businesses to come to the rescue," said Dan North, chief economist for Euler Hermes ACI, a firm that manages and insures receivables for a variety of businesses. "But businesses are not coming and spending as much as people had hoped for."

North's firm's is now projecting a 12 percent increase in business failures this year, after a rate last year that was the lowest since 1980. And he said it's not just business failures that will cause the cutback in spending. He said less closely watched economic readings are showing businesses' applications for new credit dropping precipitously.

"When businesses aren't looking to get more credit, it's a fairly strong sign" of an economic slowdown, he said. North is looking for 1.5 percent to 2 percent growth in gross domestic product (GDP) this year, below most forecasts.

And even some economists more bullish about 2007 agree that the pullback in business investment is a cause for concern.

"They're already in the slowdown mode," said Brian Bethune, U.S. economist for Global Insight, an economic consulting firm in Lexington, Mass. "Certainly what we're seeing is they're playing it very conservative at this point. Our expectation is there should be some pickup, but there is a certain amount of anxiety among CEOs about the outlook."

And one very prominent economist - former Fed Chairman Alan Greenspan - reportedly warned in a speech on Monday that signs are cropping up typically associated with the end of a business expansion, and that there could be a recession in 2007.

"When you get this far away from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign," The Wall Street Journal reported Greenspan as saying, adding that while most forecasters didn't see one, he couldn't rule out the possibility of a recession later this year.

That outlook seemed to be echoed by some other indications of reduced business investment and spending since his remarks.

The government said Wednesday morning that GDP, the broadest measure of the nation's economy, grew at just a 2.2 percent annual rate in the fourth quarter, down from the 3.5 percent original estimate a month ago.

The main difference? Sharply lower business investment and business inventories than previously forecast.

Tuesday, a separate report on durable goods orders, the big-ticket, long-term purchases such as equipment, vehicles and computers, showed a 6.0 percent decline in new orders for capital goods excluding aircraft and defense spending.

That reading that is typically the clearest barometer of business spending. It was the largest such decline in three years and one of the biggest drops on record.

While much of the sharp sell-off in stocks on Tuesday has been blamed on the Chinese stock market, there is also growing concern among investors that earnings growth going forward will be the weakest in nearly five years, since shortly after the end of the last recession in late 2001.

Earnings tracker First Call is now forecasting year-over-year earnings growth of just 3.9 percent for companies in the Standard & Poor's 500 in the first quarter. That would likely end a streak of 14 straight quarters of double-digit growth and be the thinnest gain since the second quarter of 2002.

Eight weeks ago the forecast for first-quarter earnings growth was 8.7 percent. And the outlook for the second quarter is growth of just 4.5 percent, down from the 6.8 consensus estimate before earnings season got underway.

Still, there are other economists who believe that business spending should pick up soon, particularly with the drop in business inventories seen in the latest GDP report.

Bernard Baumohl, managing director of The Economic Outlook Group, a Princeton, N.J., research firm, said the drop in business spending in the fourth quarter made sense given worries that high gasoline prices and housing weakness would hurt consumer spending, which accounts for more than two-thirds of the economy.

"They were saying, 'The economy looks like it's slowing dramatically, I'm going to postpone some business investment until I get a better idea'," he said, referring to CEOs and other corporate execs. "But the demand side of the economy continues to be strong. I suspect that later in this quarter they'll be reordering to restock their inventory and picking up their capital investments."

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