NY Times. Capital Investment by U.S. Companies Takes a Break
nytimes.com
September 18, 1998
By LOUIS UCHITELLE
aving just built one new factory and expanded another, the
Chrysler Corporation is cutting back on capital investment.
AT&T has also shaved its capital spending, but for a different reason:
It purchased an existing phone network, rather than spending the
money to build a new one. And Motorola Inc., its sales hurt by the
Asian crisis, is postponing investments in new factories and
machinery, even going so far as to halt construction of a huge $3
billion semiconductor plant in Virginia.
Capital spending, a pillar of the nation's strong economic growth over
the last three years, is beginning to fade. First falling exports, then
falling stock prices and now a slowdown in capital spending are
chipping away at the vigorous economy, watering down growth in the
second half of the year. Despite these hits, the economy appears to
be strong enough to stay out of recession for now, thanks to robust
consumer spending.
"The economy is not falling apart," said David Wyss, chief economist
at Standard & Poor's DRI, a data gathering and forecasting service.
"What you are seeing is some evidence of a weakening in capital
spending, partly in response to Asia and partly because, in most
industries, we have already added as many new facilities as we are
likely to need for a while."
Capital spending is the investment that companies and individuals
make in the machinery, equipment and buildings to operate their
businesses and make them more efficient. The cumulative result is a
more vigorous and productive economy. In the 1990's, robust capital
spending has been a huge contributor to the economy's overall
growth, accounting for 25 percent of the total expansion in output in
this decade -- substantially more than in either the 1970's or the
1980's.
While the falloff in sales to Asia has played a significant role in
discouraging capital spending, a bigger obstacle -- one only partly a
result of the Asian downturn -- appears to be overcapacity. In
interviews with officials at 15 corporations, many said that after
having made huge investments in recent years to increase production,
they were pausing while sales caught up.
Even without an outsized crisis like the one emanating from Asia,
corporate America normally goes through cycles of robust capital
spending followed by pullbacks. And more than seven years into the
current economic expansion, this appears to be a time for pullback.
"Until we see that more demand is likely to occur, we are not going to
go into another cycle of capacity expansion," said Wynn Van
Bussman, the chief economist at Chrysler, which recently completed
a new engine factory in Detroit and expanded a transmission factory.
"We don't expect sales in North America to be higher in the next year
or two than they already are this year."
Like Chrysler, Levi Strauss & Company worries about overcapacity.
Even after closing 11 factories in the United States in recent months,
the company still has the capacity to manufacture more jeans than it
can sell in this country. So it is shifting money out of its capital
spending budget and into marketing. "In the United States in the next
year, we will come close to doubling our advertising and promotion
budget," Clarence Grebey, a Levi Strauss spokesman, said, "and part
of that is coming from capital expenditure."
Capital spending at Motorola, the communications giant, has been
curtailed because of a worldwide downturn in semiconductor sales
and falling prices for these computer chips. The downturn is partly a
result of recessions in Asia and partly a result of overcapacity
domestically.
Whatever the balance of those reasons, Motorola's $4.5 billion
capital spending budget for this year, much of it earmarked for the
United States, has been slashed to $2.9 billion. Nearly half the
cutback involves semiconductor operations. Motorola announced on
Wednesday that while construction continued at a huge
semiconductor plant in Chandler, Ariz., ground-breaking for another
equally large one near Richmond, scheduled for next month, had been
postponed -- "until the market for semiconductors justifies new
construction," Scott Stevens, a Motorola spokesman, said yesterday.
"Do I have any idea when that will be? No. This is an unprecedented
downturn, the worst in semiconductor history."
The incipient pullback in capital spending is developing rapidly. After
having shot up at an annual rate of 16 percent from January through
June, the growth rate for capital outlays will probably shrivel to 5
percent or 6 percent in the second half, some forecasters say. That
would subtract at least one-quarter of a percentage point from the
growth rate for the economy as a whole. Even without the hit from
capital spending, economic growth is likely to be under 2 percent, as
it was in the second quarter. During that quarter, falling exports and
excessive stockpiles of unsold goods forced a variety of cutbacks in
production.
Shrinking profits are also playing a role in corporate America's
decision to go easy on capital spending. And falling prices have had
their impact, particularly in such industries as steel, copper, oil and
agriculture. The Case Corporation, for example, announced last
week that it was curtailing production of tractors and combines,
which are capital expenditures for farmers. The Phelps Dodge
Company has responded to falling copper prices by cutting capital
outlays to less than $180 million in the second half from $280 million
in last year's first half.
"The supply of copper and the demand for it are in pretty good
balance," Thomas M. Foster, a Phelps Dodge vice president, said.
"But we have seen lower copper prices for some time, and they
appear to be related to the perception that the Asian crisis will
precipitate a worldwide slowdown. So we have not initiated new
projects at any of our plants."
In some cases, acquisitions have become a substitute for capital
spending. AT&T took this route. Rather than invest huge sums in
local lines to connect business customers to AT&T's long-distance
network, the company in July acquired Teleport Communications
Group, which already owns local networks in major cities. The
acquisition was a factor in AT&T's decision to hold capital spending
to $7 billion this year, roughly the same as last year -- after four years
of rapidly rising investment.
"Without this purchase, we might have invested more to create
infrastructure," said Eileen Connolly, an AT&T spokeswoman.
Detailed economic data for the third quarter will not be available until
next month, but various statistics are signaling the turn in capital
spending. For example, spending on commercial construction,
particularly factories but also office buildings, has begun to fall, the
Commerce Department reports. Orders for nondefense capital
goods, which are most of the equipment and machinery purchased by
American companies, leveled off in the first half, after having risen
sharply in 1996 and 1997. And corporate America is operating its
productive facilities within the United States at a relatively moderate
81.7 percent of full capacity, which is slightly below the long-term
average.
The National Association of Purchasing Management, in a monthly
survey of American manufacturers, found that capital spending
projects currently in progress would take only 119 days on average
to complete -- down from 130 days last summer. The 119 days is the
lowest level in the nearly 11 years that the association has compiled
this statistic, suggesting that companies are commissioning fewer new
projects.
The association also surveys companies in the service sector.
Although this survey lacks a specific question about capital spending,
answers to questions that are included give the strong impression that
service-sector companies are also cutting back. "Capital spending at
service companies is certainly not increasing; at best it is flat," said
Ralph Kaufman, a University of Houston management professor who
runs the service-sector survey.
There are bright spots. Although Asian recessions have cut into
Caterpillar Inc.'s sales of earthmovers and construction equipment,
the company says it is increasing capital spending anyway. "We are
moving into new products," said Douglas R. Oberhelman,
Caterpillar's chief financial officer, "including electric power
generation from diesel engines and the manufacture of very small
combines and tractors, which is a good business at the moment."
Consumer spending, far and away the largest single outlay in the
American economy, is still quite strong, and that helps to sustain
capital investment, which in the second quarter reached $958 billion,
adjusted for inflation, or roughly one-fifth of consumer spending. Low
interest rates have helped by encouraging store purchases on credit
and home building.
Responding to brisk retail sales, Gap Inc. has set aside $700 million
for capital spending this year, up from $450 million last year --
earmarking most of the money for new Old Navy and Gap stores.
Federated Department Stores Inc. is similarly engaged in store
investment: $750 million a year over three years, but mainly to
remodel existing stores, not to expand the total number. Hotel and
theater construction is still robust, and so is investment in fast-food
restaurants.
Wendy's International Inc., trying to catch up to the McDonald's
Corporation and Burger King, a unit of Diageo P.L.C., says it will
add 675 new restaurants next year, mostly in the United States, up
from 550 openings this year. "Ever since we opened our first
restaurant 30 years ago, experts have told us that the hamburger
restaurant market is oversaturated," Jack Lynch, a Wendy's
spokesman, said. "Despite that warning, we now operate 4,600
restaurants in the United States and 600 more abroad. An economic
slowdown won't change our plans; we do fine in a recession."
Still, these are exceptions. The Eastman Chemical Company is more
the rule.
When the Asian crisis struck, Eastman, which produces ingredients
for the manufacture of plastics, paint and other coatings, was in the
midst of an investment surge aimed at expansion. The spending is
winding down now, more quickly than anticipated because of events
in Asia, said Earnest J. Davenport Jr., the chairman at Eastman. That
is partly because foreign chemical companies are shipping products to
the United States they can no longer sell in Asia, and that cuts into
Eastman's sales volume.
"We have delayed some planned capital spendingprojects in this
country," Davenport said, "and we may delay others."
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