Fisher Investments Editorial Staff
US Economy

Not So Ghoulish October

By, 11/16/2010

Story Highlights:

  • US October retail sales increased by the most in seven months.
  • Consumption remains a prime concern: Some folks believe lower unemployment (and thus more discretionary income) is necessary for a sustainable recovery—but we don't agree.
  • But the fundamental story here is that better retail sales further increase business spending power.
  • Businesses have a record amount of cash, are beginning to spend it, and will be working off the excess for awhile—but when cash finally dwindles, it won't mark the end of spending.

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Consumers braved Halloween hordes to push US October retail sales higher by the most in seven months—which is pleasant news and perfectly consistent with how recoveries typically play out. Consumption remains a prime concern for those believing lower unemployment (and therefore more discretionary income and consumer spending) is necessary for a sustainable economic recovery. We don't think the two are quite so dependent on each other (as the latest retail numbers show). But for those who do worry folks aren't able to buy stuff right now, better-than-expected retail sales could help boost investor and consumer sentiment.

The more fundamental story here is better retail sales further increase business spending power by padding balance sheets with cash—of which there is a record amount currently (a theme we've followed closely). Business spending is a powerful economic driver, and businesses continue spending.  M&A, which hit a low in 2009, was projected this week to hit $3 trillion in 2011—below 2007's $4.28 trillion, but a very solid showing nonetheless (if it plays out as expected). Resurgent M&A, share repurchases, and business investment all bode well for growth.

But the private sector will eventually work through its cash surplus. Which begs the question: If cash is such a bullish factor, what happens when it's not setting records? Isn't that bad news? Actually, quite the opposite. Even after the cash surplus dwindles, business spending will likely continue—it's not a zero sum game. Firms don't spend without expecting some return. Companies are profitable now—unexpectedly so—thanks to smart investments, productivity gains, and revived sales. Firms spend money to get even more back. At this point in the economic cycle, there are plenty of lucrative investments to be made. Spending begets profits, which beget more spending, and more profits, etc. It's a virtuous cycle that needn't end with lessened cash hoards. Rather, less cash means money is being put to more productive use—and that's good for GDP, earnings, and stocks.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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