A Mirror Image Of 2001

If there was a bright spot to Friday’s weaker than expected GDP report, it’s how far business investment has come in the last three years.

The first reading of second quarter GDP came in at 3%, below the 3.7% economists were expecting. The culprit was a paltry 1% gain in consumer spending, the weakest since the economy was sliding into recession in the second quarter of 2001.

That’s no small warning sign, since consumer spending makes up two-thirds of the economy. But the difference this time is that business investment was up 8.9% in the second quarter, fueled by a 10% jump in software and equipment spending, which was actually an improvement over the first quarter’s rise of 8%.

Back in the second quarter of 2001, business investment plunged 13.6%, dragging the rest of the economy into recession.

It’s a much different economy this time, but consumer weakness is still worth watching. Consumers never retrenched in the 2001 recession, so they may well be due for their own pullback at some point. Next time, it may be up to business to rescue the economy. Let’s hope it’s up to the task.

Businesses are much more restrained than they were in the last boom. According to Business Week, S&P 500 companies are holding twice the cash levels they were in 1999. And at the very end of the second quarter, there was a noticeable downtick in business spending, witness the rash of technology warnings in recent weeks.

Continued economic expansion will very likely depend on businesses continuing to hire and invest. So far, that’s what separates 2004 from 2001.

Stocks gained once again on Friday, as strong manufacturing and consumer confidence reports made up for the weaker than expected GDP reading and rising oil prices.

The Nasdaq rose 6 to 1887, the S&P 500 gained 1 to 1101, and the Dow rose 10 to 10,139. Volume declined to 1.3 billion shares on the NYSE, and 1.52 billion on the Nasdaq. Advancers led 20-11 on the NYSE, and 17-13 on the Nasdaq. Upside volume was 57% on the NYSE, and 66% on the Nasdaq. New highs-new lows were 71-28 on the NYSE, and 51-66 on the Nasdaq.

KLA-Tencor led tech stocks higher, surging 6% on strong earnings and an upgrade.

Also rising on earnings reports were ClickCommerce , LookSmart , NetGear , International Rectifier , Intersil , MatrixOne , Microtune , Sapient , Affiliated Computer , Adaptec , S1 , Ingram Micro and Varian Semi .

Netegrity , Western Digital , Synaptics , California Micro , Conexant , Hypercom , Mobility , Opnet and Primus fell on their reports.