The Conference Board's index of chief executive confidence rose to 50 in the fourth quarter from 44 the previous three months, the independent New York research group reported yesterday. The third quarter reading marked the first time the index dropped below 50, which reflects more negative than positive responses, since the final three months of 2001.
Growth picked up last quarter as lower gasoline prices, unseasonably warm weather, and rising incomes drove consumer demand, helping temper concerns that a faltering housing market would spread to other areas of the economy. The index of the outlook for the next six months rose to 50 last quarter from 43, suggesting business leaders foresee continued expansion.
This could indicate an increase in corporate expenditures in the coming months which has shown some strength over 2006. According to the Bureau of Economic Analysis' NIPA tables, nonresidential fixed investment increased 13.7%, 4.4% and 10% in the first through third quarter of 2006, respectively. This has helped to offset the decline in residential investment of -.3, -11.1% and -18.7% over the same period. Total nonresidential investment -- which includes real estate and equipment/software expenditures -- accounted for 63.53% of total domestic investment in the third quarter of 2006. Finally, corporations have a ton of cash to spend. According to the Federal Reserve's Flow of Funds statement, corporate savings (undistributed corporate profits) have increased from $364 billion in the first quarter of 2005 to $516 billion in the third quarter of 2006. This is one of the reasons why we have seen so much M&A activity over the past few quarters; corporations have a ton of cash to spend.
So -- confident executives could mean that corporate investment picks up the pace to its early 2006 levels. This would help to offset the decline in residential investment, which the economy as a whole needs right now.