Posted on 04/20/2003 3:55:40 PM PDT by Willie Green
For education and discussion only. Not for commercial use.
NEW YORK -Those hopes for a postwar surge in corporate spending are fizzling fast. Businesses aren't ready to put money toward capital goods just yet.
It comes down to this: When you buy new forklifts, build factories or upgrade technology, you want to see solid returns on your investments. But it's hard to guarantee any payback when customer demand is so uncertain.
So companies feel paralyzed, at least for now, and that is bad news for the already fragile economy. Corporate-spending gains are key to getting the economy's engines roaring again.
Capital spending tumbled along with business confidence in February. That was disappointing after things had started looking up last summer after a two-year slowdown.
Much of the blame for the recent spending curbs went to the uneasiness of executives about the prospects of war. They could not plan to buy when they did not know how long the battle would last.
But now, with the fighting pretty much over, it appears war was not the only reason spending stalled. Volatile stock markets and continued economic weakness remain the more crucial components in business leaders' decision-making.
With so much uncertainty still looming, they worry that they will not be able to get out of the investments what they put in.
"We found that the cost of capital exceeds the return on capital" in many sectors, David A. Rosenberg, chief North American economist at Merrill Lynch & Co. Inc., said in a recent report. "So where is the incentive to embark on a capital investment spree right now - or in the near future?"
A recent survey by the Business Roundtable, an advocacy group of chief executive officers from some of the nation's biggest companies, found that 27 percent expect to reduce their capital spending over the next six months.
Fifty-five percent say they will spend what they do now, which in many cases is down drastically from just a few years ago.
Microsoft Corp. provided some evidence last week of the troubling outlook. The world's largest software-maker said its customers - both computer manufacturers and companies investing in new technology - do not anticipate an upturn in demand.
The company, therefore, cautioned that its earnings going forward might fall into the lower end of Wall Street's estimates. The warning came as a bit of a surprise given that Microsoft holds a monopoly on personal-computer software and has largely weathered the downturn in the technology sector.
"There are no clear indications that the demand for PCs or corporate [information-technology] spending is improving, and hence, our expectations are not dependent on an improved macro-economic environment," chief financial officer John Connors said during Microsoft's earnings conference call with analysts and investors.
And high-tech is not alone in clamping down. Plenty of airlines, hotels and telecommunication firms and manufacturers have also reduced their expected capital spending for the year.
Duke Energy cut its spending by $200 million, to $3 billion, this year to free up cash to pay off more of its debt. That means less money for such things as new power plants.
McDonald's reduced its expenditures to $1.2 billion this year, cutting $700 million from its budget as it attempts to boost sales and profit.
The big concern now is how the continued spending freeze will affect the overall economy.
Many economists based their postwar bullish-growth scenarios on higher capital spending. And few anticipated any pullback by consumers.
Strong consumer buying has largely offset the steep decline in corporate spending in recent years.
But now there are concerns that consumers' spending pace could slow due to the troubled economy, namely the massive job cuts.
So without consumers driving the economy ahead as they have before, there is an increased need for business spending to kick in.
Complicating matters is that companies might keep their spending on hold until they see clearer signs that consumer spending has not faltered, said Wachovia Securities global economist Jay Bryson.
"If consumers spend at a halfway decent sort of clip, then businesses will feel better about capital spending," Bryson said.
So business waits on consumers, and consumers wait on business.
The smoke from the war is gone, but the economic picture is no clearer.
The public could have stopped this nonsense, but most feel entitled to other people's success.Where did they get that idea from?
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Good advice, we pulled our money out of the stock market years ago, and invested in real estate.
The stock market is like going to Vegas, most lose their butts.
Buy American, buy realestate, they just aint making anymore of it, and prime realestate, at a good price is becoming rare....
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You didn't rain on my parade. The union doesn't care if the execs took it back. They have decided to rescind the prior vote and re-vote. American claims the favorable vote is binding, the union disagrees. The situation remains undecided.
Such Common Sense is totally lost on the politicians WE ELECT to represent US. They apparently have ANOTHER agenda and the only part of that agenda that includes American Citizens is the TAX PAYING PART.
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