The Wall Street Journal-20080123-Credit Crunch- The Fed Acts- Capital Spending Is Expected to Slow -- for a While- Investment in Businesses Could See a Rebound In Year-s Second Half
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Credit Crunch: The Fed Acts: Capital Spending Is Expected to Slow -- for a While; Investment in Businesses Could See a Rebound In Year's Second Half
Business investment in equipment and software -- which accounts for $1 in every $13 of spending in the U.S. economy -- could be the next leg of the economy to weaken, an unwelcome development at a time when housing and commercial real estate are sinking and consumer spending is slowing.
But there are reasons a slump in capital spending may be moderate.
Daniel Meckstroth, an economist at the Manufacturers Alliance/MAPI, a public-policy group in Arlington, Va., expects business spending on software and equipment to decline in the first two quarters before rebounding in the second half, for overall growth of 2% after adjustment for inflation.
"Businesses are not really confident, but we don't see a big retrenchment either," Mr. Meckstroth said.
Last week, in an appearance before Congress, Federal Reserve Chairman Ben Bernanke said, "In the business sector, investment in equipment and software appears to have been sluggish in the fourth quarter," and he added that such spending "seems likely to slow in coming months."
In the auto industry, the slowdown in business investment has been reflected in declining sales of heavy trucks, like 18-wheelers, and of light trucks, like sports-utility vehicles and pickup trucks.
In 2007, sales of medium and heavy trucks fell 23%, according to Ward's Automotive, a trade publication that tracks industry sales. Sales of pickup trucks, which are the bread-and-butter of the construction industry, declined 5.8% in 2007, according to Autodata Corp.
Tony Sanders, general manager of Jim Clark Motors in Lawrence, Kan., said he is watching his spending carefully, given consumers' rising reluctance to plunk down money for new cars. This month, when the company had its annual computer upgrade, only two computers out of nine were updated. "We're just really watching the bottom line a lot better," he says.
Business investment accounts for 15% to 17% of gross domestic product, giving it a big role in determining whether the economy slips into recession, and if it does, how deep and long the downturn will be. In the 2000-2001 recession, business investment fell sharply because of a glut in capital stock. This time, there's not that big an overhang of capital equipment.
M. Farooq Kathwari, chief executive of Ethan Allen Interiors Inc., the Danbury, Conn.-based furniture maker and retailer, said his company is investing $70 million in the current fiscal year, which began July 1, the same as it has in recent years. Most of that is going toward repositioning their stores, closing and consolidating some outlets and investing in new locations that are more focused on providing design services as opposed to just selling chairs and hutches.
He said his business has held up reasonably well, even in the face of the housing downturn. Still, he welcomed the Federal Reserve's interest-rate cut, saying it would have an indirect but important impact on business spending by boosting consumer confidence. "It helped allay some of the fears," he said.
Technology is among the biggest business expenditures, and signs have been growing that tech spending growth will weaken this year. Forrester Research said it expects U.S. tech spending growth of 5.2% for 2008, down from 5.7% last year.
One reason for the expected slowdown: U.S. financial companies, where many of the economy's woes have been concentrated, have traditionally been big buyers of tech equipment such as server computers, personal computers and storage. Overall, as much as 18% of U.S. tech spending comes from financial companies, according to Forrester Research analyst Andy Bartels.
Ultimately, how business investment fares is up to people like Douglas True, the top technology executive at Forum Credit Union of Fishers, Ind. Mr. True hasn't had to cut his tech spending so far, largely because Forum avoided making sub-prime mortgages, he said. "We haven't seen any ill-effects yet," he says. "But at the same time, we're not recession proof."
Some other chief information officers, who make tech purchasing decisions, are actually boosting tech budgets slightly for 2008. According to a global survey of 1,500 CIOs from research company Gartner that will be released today, CIOs said they planned to increase their tech budgets an average of 3.3% this year, higher than at any point in the past four years. Many said they plan to put their money into tech products such as enterprise software, server computers, and storage.
Other businesses plan to continue investing even in the face of slowdown. Bissell Homecare Inc., a vacuum-cleaner manufacturer based in Grand Rapids, Mich., plans to nearly double its capital spending this year in order to build a warehouse, buy an expensive machine and expand office space. The company's capital budget is normally $12 million to $14 million, said Mark Bissell, the privately held company's CEO.
"Why would I pull back?" he asked. "I think this is a great time to invest in order to get benefits a few years down the road." He sees this as a time to grab market share domestically, while growing the business overseas.
Many U.S.-based multinationals are planning to increase capital spending, but much of that is going to occur outside the U.S. McDonald's Corp., for instance, said last week that it plans to spend $2 billion on capital spending this year, $100 million more than it spent last year, but it will spend less in the U.S. and more abroad.
Cummins Inc. spokesman Mark Land said the Columbus, Ind., diesel- engine maker has "plans for significant capital investment, with a lot of it manufacturing capacity on focused products in our components businesses, such as turbo-chargers. A lot of this is outside the U.S."
Michael J. Jackson, chairman and chief executive of AutoNation Inc., the country's largest chain of car dealerships, said he doesn't expect pickup-truck sales to rebound until housing recovers "and that's probably not until sometime in 2009."
In a telephone interview, Mr. Jackson said he thinks the Fed's rate move "can make a difference" in the economy, but he added he'd like to see further cuts. "I think the Fed has underestimated the seriousness of the situation since last summer and behaved in a confused manner that has only contributed to making the matter worse," he said.
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Thomas M. Burton, Conor Dougherty, Kelly Evans, Sara Murray and Josee Valcourt contributed to this article.
