biz.yahoo.com
Banks Keep Spending by Firms in Check
NEW YORK (Reuters) - At Gray Printing Co., a century-old firm in Fostoria, Ohio, revenues are up 16 percent to 18 percent over the previous year, but the company is spending less than last year on new technology.
That contrast, repeated many times over, is not good news for a U.S. economy that needs businesses to spend money to help propel the U.S. economy out of its slump.
The U.S. economy grew just 0.7 percent in the April to June quarter and a major reason for that barely visible expansion was a sharp 13.6 percent fall in business fixed-investment, the biggest drop in 19 years. The decline was led by a 14.5 percent drop in spending on equipment and software.
``Capital spending in the aggregate remains exceptionally soft, as orders and shipments of technology goods continue to crater,'' said economists at Credit Suisse First Boston, adding that there was little evidence that business investment was poised for a rebound in the near future.
In 2000, when real GDP grew 4.1 percent, capital spending accounted for nearly a quarter of that growth.
Referring to data from the Federal Reserve Bank of Philadelphia's August Business Outlook Survey, bank economist Michael Trebing said on Thursday that business capital expenditures remained weak.
DROP FROM LAST YEAR
Late last year Gray Printing spent about $500,000 to buy and install computer-to-plate equipment that eliminates film from the traditional photographic process.
Robert Gray, president and chief executive officer of the firm, said the new equipment ``has had a huge payback,'' reducing labor and material costs.
Gray would like to invest in more new technology, but is put off by the conditions banks attach to the loans he would need to finance that investment.
``Even with good feasibility studies and payback, we found our banks to be pretty tight-fisted,'' he said. ``They are strict with covenants and restrictions.''
Gray, who also serves on the Business Advisory Council of the Federal Reserve Bank of Cleveland, said because of that he is ``reluctant to spend for the rest of the year.''
BUSINESSES HOLD OUTLAY PLANS TO TOUGHER STANDARD
If banks are cautious about lending, many businesses are applying stricter standards to themselves before investing in bricks and mortar, new equipment or software.
``In our case, capital spending has to increase both capacity and productivity,'' said Cheryl Krueger, president and chief executive officer of Cheryl & Co., a gourmet food and gift company near Columbus, Ohio, whose revenues last year totaled $26 million.
``We need machinery that will let us produce more in the same square footage so we don't have to break out walls,'' said Krueger, a director of the Federal Reserve Bank of Cleveland.
This year Cheryl & Co., with sales up 25 percent due to a fast-growing Internet business, plans to boost capital spending by 10 percent. It will finance those purchases internally.
At IntraLinks, a New York City-based firm offering Internet-based communication services to corporations and institutions, management is differentiating between necessary spending and outlays that can be postponed, said James Dougherty, the firm's chairman and chief executive officer.
IntraLinks raised $50 million in March and used much of that money to build infrastructure to accommodate its anticipated growth for the next 18 months, Dougherty said.
But when it comes to purchasing for internal use, IntraLinks is more restrained.
``We'll repair printers where once we might have gotten new ones. We'll upgrade laptops instead of getting new ones,'' Dougherty said. ``We're stretching things out a little more.''
IntraLinks' business grew nearly 400 percent last year and it kept an eye on costs then, Dougherty said. ``But this year we're more attentive. Absolutely, positively.''
AMPLE CAPACITY
Because the late 1990s investment boom in capacity and productivity was followed by bust in orders and production, U.S. businesses have ample capacity to accommodate any near-term rise in orders.
The Federal Reserve reported on Wednesday that the nation's production facilities operated at a mere 77 percent of capacity in July, leaving businesses with little reason to invest in further expansion.
``Over the last year and a half, we either built or updated several of our plants so we do not intend to spend any significant money over the next one or two years,'' said Randy Fortener, chief financial officer of Crane Plastics, a Columbus, Ohio-based firm led by its founder's granddaughter.
FOR SOME FIRMS, A STEADY COURSE
At Pittsburgh, Pennsylvania-based Mine Safety Appliances business spending surged in the late 1990s as the $500 million company made big investments in its chemical division and in information technology related to a new Alpha Sierra pump.
Mine Safety is still investing in information technology, said John Ryan III, chairman and chief executive officer.
``We stick to our strategic plans,'' he said. ``You adjust current spending if business is bad, but we've generally kept to our capital equipment plan. We'll be steady as you go.'' |
