- The Washington Times - Monday, November 15, 2010

The economic outlook has brightened noticeably in recent days, with a splurge of car-buying by consumers unexpectedly lifting retail sales and businesses putting some of their nearly $2 trillion in stashed cash to work buying other companies with an eye toward growth.

The improvement likely reflects confidence that the economy will not fall into a double-dip recession, but will keep growing, thanks in part to the Federal Reserve’s extreme ministrations and the likelihood of more pro-business policies coming out of Congress, analysts said.

“The economy appears to have regained momentum early this quarter,” said Aaron Smith, an economist with Moody’s Analytics. “Consumers are spending more freely,” gaining confidence from more private-sector jobs and higher stock prices.

A report from the Commerce Department on Monday showed an unexpectedly robust 1.2 percent jump in retail sales in October - the biggest in seven months - propelled largely by a torrid 5 percent surge in auto-buying.

The best pace of auto sales in two years has lifted the fortunes of General Motors Co. and other automakers, some of which were in bankruptcy nearly a year ago. GM is preparing one of the largest stock offerings in history this week and has found so many potential buyers that it may raise its planned price for the shares.

Bernard Baumohl, an economist at the Economic Outlook Group, said the surge in auto sales is a telling sign for the economy, showing that consumers felt confident enough to take out loans, increase their debt loads and buy new cars for the first time this year.

Consumers also have been shelling out cash to dine out more, as well as indulge in their favorite sports, hobbies and gambling - key discretionary spending areas that usually do well only as the economy improves, he said.

Even excluding auto sales, retail spending hit a record high of $306 billion last month, he said, though sales overall remain nearly 2 percent below highs set in 2007.

“The American consumer has now come alive,” Mr. Baumohl said. “Given their importance to both the U.S. and international economy, the outlook for the recovery keeps getting better.”

Businesses also have caught wind of the gathering speed of the recovery, and are laying plans to expand in areas where they expect the economy to grow.

Wall Street is hosting a surge of acquisitions, with big-name companies such as Caterpillar and Chevron acquiring stakes in markets with the potential to boom. In doing so, such corporations are deploying some of the record $1.84 trillion in cash they have been hoarding this year.

Mergers and acquisitions activity is running 28 percent ahead of last year, totaling $2.25 trillion in the first 10 months of the year, according to Dealogic, which provides investment banking and capital markets services.

Caterpillar, the world’s largest maker of construction equipment, is buying mining-equipment maker Bucyrus International for $7.6 billion in cash, better positioning the construction giant to take advantage of rapid development in emerging markets around the globe.

Chevron Corp. is buying natural-gas producer Atlas Energy Inc. for $4.3 billion to gain access to rich shale gas fields in the eastern United States that promise to produce much of the region’s energy in the future.

“It’s an early indicator that confidence is shifting,” George Geis, a mergers specialist at the University of California at Los Angeles, said of the acquisition wave.

Jeffrey Kleintop, chief market strategist at LPL Financial, said businesses may be taking a cue from the midterm elections, which returned Republicans to power in the House.

Businesses were put off by the sweeping legislative and regulatory reforms enacted by the Democrat-controlled Congress, and now welcome the “more moderate path of legislative change” likely to result from gridlock between the parties.

“Businesses had been hesitant to make the capital commitments to growth” before the elections, he said. Now, “business leaders are more likely to make the commitments to growth that drive the economy, including additional hiring.”

Brian Bethune, economist at IHS Global Insight, said the “low-frequency improvement” in the economy recently has occurred under the radar for many investors and pundits, who continue to focus on bad news about the economy.

Last week, stock markets tumbled on an array of news, including a higher Chinese inflation rate and misgivings about the Fed’s program to boost growth by purchasing $900 billion in Treasury bonds in the next eight months.

Pundits focused on sharp disagreements at the Group of 20 economic powers summit in Seoul, where critics from Germany and China accused the Fed of trying to drive down the value of the dollar and spark inflation.

But that occurred even as the dollar was rising in global markets, reflecting “clear signs of improvement” as the economy responded to the Fed’s ministrations, Mr. Bethune said, as well as worries about an implosion in Ireland reviving the European debt crisis.