Even as Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke continue to make the case on Capitol Hill for a speedy delivery of a gigantic bailout package for the troubled financial industry, questions about the near-term prospects for the broader U.S. economy abound. The ongoing drama has tended to obscure some of the other pressing issues for the economy. But with the start of third-quarter earnings reporting season just one week away, it won't be long before investors start to shift their attention from the latest Wall Street debacle to the ongoing challenges faced by Main Street.
The two realms of economic activity are linked of course, but the government's historic actions these past two weeks have all but eclipsed what had been driving the markets until recently: concerns over anemic consumer spending and rising unemployment. To the extent that strength in the U.S. economy has been led by robust exports—a byproduct of a seven-year decline in the dollar—a $700 billion bailout fund or whatever size the Troubled Asset Relief Program turns out to be could be just the thing to ensure the U.S. continues to stave off a technical recession, since everyone seems to agree the added national debt would further hobble the greenback.
Consider this: Of the 3.3% growth reported for U.S. gross domestic product in the second quarter, 3.1% came from exports. Although the resurgence in the strength of the dollar since early August until last week has helped tame commodity prices, which may boost consumer spending, the loss of the competitive advantage in world trade provided by a weaker U.S. currency may more than offset those gains and dramatically slow the economy's expansion.
It may be useful to zero in on a diverse group of industries and their prospects. Here, BusinessWeek takes a look at some of the bellwether groups that may offer some clues as to how the economy will perform as we head into the homestretch of 2008.
Software
One of the strongest export sectors has been technology, with non-U.S. markets generating as much as one-third of total revenues for some software manufacturers. Some observers believe that technology companies will continue to do well even if the global economic slump deepens because foreign governments and businesses can't afford not to keep upgrading their systems and processes. Others see weaker economic conditions drying up businesses' investment in information technology.
Oracle (ORCL), seen as a leading indicator of the fortunes of enterprise software manufacturers, recently said it saw no weakness for the third quarter and that its product pipeline is robust, according to Richard Williams, a software analyst at independent research firm Cross Research in Livingston, N.J. But when he took a deeper look at the company's numbers, Williams says he saw some signs of decelerating business activity, most notably in database support and update lines, or the maintenance service and patches customers buy to take advantage of product improvements.
"Oracle has been surprisingly weak in database applications for two quarters in a row," he says. "That's not something off-the-cuff I'd think customers would economize on." That could be an early indicator of weakness in larger companies since Oracle sells primarily to large, high-end and midsize companies around the world, he adds.