Three signs that the economy could be poised to boom

Before you go, we thought you'd like these...
Before you go close icon

Being optimistic by nature, I like to look for good news. So, a handful of recent articles on the economy struck me as a possible harbinger of good times ahead. These reports suggest that consumers and businesses are wising up by borrowing less, living within their means, and -- in the case of a lucky handful of companies -- piling billions of cash onto their balance sheets through initial public offerings. These developments could be laying the groundwork for an economic recovery.

Since 70 percent of GDP growth comes from consumer spending, the reports that consumer spending and borrowing are down clearly suggest short-term bad news. On Oct. 7, AP reported that more people are using food stamps and that more are cooking at home instead of going out to restaurants. With 15.1 million unemployed, this doesn't come as a big surprise.

Nor does news that consumers are borrowing less. Also on Oct. 7, the Federal Reserve reported that consumer debt outstanding fell in August at a 5.8 percent annual rate by $12 billion -- $2 billion more than Wall Street economists expected. Credit-card debt fell by 13.1 percent -- which is why, without cash-for-clunkers, it's unlikely that consumer spending will continue to grow at August's 1.3 percent rise. Indeed, the National Retail Foundation thinks 2009 retail sales will fall 3 percent.

Intriguingly, while consumers are re-equitizing their balance sheets, some companies are adding billions in equity to theirs. AP reports that just yesterday, two companies raised $10 billion in the IPO market -- more than 10 times the $917 million raised in IPOs during 2008's third quarter. Both were well-established companies: Banco Santander Brasil SA pulled in $8.1 billion, while Verisk Analytics (VRSK) -- a company I consulted to in 2002 -- raised $1.9 billion from investors.

Verisk is a very interesting company to me. It's owned by a slew of property-casualty insurers, which give it their data on losses. Verisk analyzes the information and helps its customers make better business decisions. With $893 million in 2008 sales and $158 million in profit, Verisk's wide profit margins and strong prospects may have contributed to the stock's hefty 25 percent increase on its first day of trading.

The economy will need much more equity on corporate balance sheets and much less debt -- BusinessWeek in August carried a report from Standard & Poor's that a great corporate deleveraging is underway -- if we're going to see a virtuous cycle that boosts economic growth. Such a cycle would start with companies using that equity to hire workers. Once employed, those fiscally conservative workers would resume spending, which would boost demand. That increase in demand would force companies to hire more workers. And so on.

It might just happen, and then corporate earnings would rise -- perhaps high enough to justify this year's spike in stock prices.

Peter Cohan is amanagement consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He has no financial interest in the securities mentioned.

Read Full Story

Markets

S&P 500 2,241.35 29.12 1.32%
DJIA 19,549.62 297.84 1.55%
NASDAQ 5,393.76 60.76 1.14%
DAX 10,986.69 211.37 1.96%
HANG SENG 22,938.90 137.98 0.61%
NIKKEI 225 18,649.03 152.34 0.82%
USD (per EUR) 1.08 0.00 0.17%
USD (per CHF) 1.01 0.00 -0.09%
JPY (per USD) 113.33 -0.38 -0.33%
GBP (per USD) 1.26 0.00 0.16%

From Our Partners