NY Times. Capital Investment by U.S. Companies Takes a Break
nytimes.com
September 18, 1998
By LOUIS UCHITELLE
(caution - US economic slowdown up ahead?)
Having 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."
Copyright 1998 The New York Times Company |
