Investment versus consumption

I am becoming rather worried about investment spending. Yesterday, one of my colleagues returned from a meeting with his investment trust board in which the finance director of a UK utility and a board member of a major bank told him that credit is essentially not being advanced to anyone, regardless of their perceived creditworthiness. The finance director said that companies were now basically being run for cash, which is then being hoarded to protect against any refinancing risk.

If this is true - and to be fair I have heard conflicting reports from other sources suggesting that credit is still available to some companies - then it does not bode well for any kind of discretionary corporate spending, whether it be expansionary capex, advertising and marketing or R&D. As is well known, investment spending is the most volatile component of GDP. Just take a look a the following chart, which shows investment spending in the UK economy over the past 50 years.

Admittedly the last two quarters of data (Q1 and Q2 2008) were negative, but only marginally so. We are a long, long way away from the -10% to -20% seen in past recessions. With the credit market still bunged up and managements terrified of a recession, it seems pretty unlikely that we wont see at least a few quarters of -10%. Of course with the recent sell off in everything exposed to corporate end markets it may be that the shares are already pricing in this outcome, even though consensus estimates clearly are not. However against this stocks do still seem to go down on the profit warnings, as Cookson showed today.

The other thing to remember is that, for all the bearishness on the consumer, consumption expenditure is much less volatile than investment. Over the past 50 years, the reported number has never been worse than -4% y-oy. Of course within this there will be a large variation - electrical goods will be a lot worse than clothing, which will be a lot worse than food etc. Nevertheless, I can't help but feel a little more positive on the consumer, at least on a relative basis - big downgrades have already been put through, interest rates are coming down etc., - while none of this has really begun yet for the industials.