The economy is in a bit of a Catch-22. Businesses want to see consumers buy things before they invest, but consumers aren't going to buy things until they have jobs and companies begin to invest. So the question becomes: Who is going to invest first?
Burt White, chief investment officer for LPL Financial, says it has to be companies. "Companies overcut to protect profits," White said in an interview. "[But] they are not doing the things to invest for their future as rapidly as I think needs to happen."
White says the recovery is a like a relay race. The first runner, the central bank, has already run. Now it's time to pass the baton on to corporate America to start increasing investment, taking on new initiatives, hiring people, and launching new product lines.
But companies have remained very cautious on spending because of the uncertain economic outlook and new regulation out of Washington such as health-care and financial reform legislation. So what is it going to take for businesses to really start deploying that cash in droves and when is that going to happen?
"I think it's all about corporate America getting to a point where they recognize that this recovery is sustainable," says White. "A lot of them feel like this recovery's not sustainable; especially in the more consumer-oriented areas."
But while we haven't yet seen a commitment to the recovery from the consumer or financial sectors -- two very important sectors -- we are beginning to see investment and spending within the materials, industrials and technology sectors. The catch is that these sectors rely more on global growth, especially from emerging markets, which are experiencing strong recoveries.
Look no further than Caterpillar (NYSE: CAT ) . In its second-quarter earnings conference call, Caterpillar executives said that orders have continued to outpace shipments, and that the company expects to increase production in the second half of the year.
3M (NYSE: MMM ) , and Honeywell (NYSE: HON ) have also committed to this recovery, with comments from 3M management stating that the company's "new product vitality index" is the highest in recent memory, and that it expects to make more acquisitions in the second half of the year. Honeywell says its investment in emerging market regions are already paying off, while the company continues to invest across its business and undertake new product development.
Technology is another prominent sector that's seeing strong recovery and beginning to invest. Microsoft's (Nasdaq: MSFT ) second-quarter earnings, which jumped 48% in the quarter on demand across all units of its business, exemplify business' commitment to invest in technology. Tech companies themselves are also investing. Cisco (Nasdaq: CSCO ) plans to hire 3,000 people over the next two quarters and has made two acquisitions.
So while business spending is beginning to trickle in, White says it might be some time before we see a real acceleration in business spending, and that it will be lumpy when it happens, sector by sector. "Returning to normal business spending levels will take some time, as companies realize that the economic expansion is for real," said White. "As they continue to invest, employ individuals and take on new initiatives, that will eventually jump-start the consumer."
For more analysis from White: