Investment Falls Off a Cliff
U.S. Companies Cut Spending Plans Amid Fiscal and Economic Uncertainty
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By SUDEEP REDDY and SCOTT THURM
U.S. companies are scaling back investment plans at the fastest pace since the recession, signaling more trouble for the economic recovery.
U.S. companies are scaling back investment plans at the fastest pace since the recession, signaling more trouble for the economic recovery. Sudeep Reddy reports on Markets Hub. Photo: AP.
Half of the nation's 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next, according to a review by The Wall Street Journal of securities filings and conference calls.
Nationwide, business investment in equipment and software—a measure of economic vitality in the corporate sector—stalled in the third quarter for the first time since early 2009. Corporate investment in new buildings has declined.
At the same time, exports are slowing or falling to such critical markets as China and the euro zone as the global economy downshifts, creating another drag on firms' expansion plans.
Corporate executives say they are slowing or delaying big projects to protect profits amid easing demand and rising uncertainty. Uncertainty around the U.S. elections and federal budget policies also appear among the factors driving the investment pullback since midyear. It is unclear whether Washington will avert the so-called fiscal cliff, tax increases and spending cuts scheduled to begin Jan. 2.
Companies fear that failure to resolve the fiscal cliff will tip the economy back into recession by sapping consumer spending, damaging investor confidence and eating into corporate profits. A deal to avert the cliff could include tax-code changes, such as revamping tax breaks or rates, that hurt specific sectors.
President Barack Obama called a number of business executives over the weekend, including Warren Buffett, Apple Inc. AAPL +6.75% Chief Executive Tim Cook and J.P. Morgan Chase's JPM +2.48% James Dimon, to promote his solution to the looming budget crisis. All sides in Washington, in a departure from a year of deep divisions, have pledged to work together and compromise to avoid going over the cliff.
"The whole world is looking for stability and clarity from the United States," said David Seaton, chief executive of Fluor Corp., FLR +1.64% a large engineering and construction firm. If uncertainty isn't removed, he said, "people will sit on their war chests of cash and return it to shareholders. You'll have a retarded growth trajectory."
Should the White House and Congress strike a deal to avoid the fiscal cliff, the economy could get a boost. "You might very well get a burst of pent-up demand coming at the start of next year," said Paul Ashworth, chief U.S. economist at Capital Economics, a consultancy.
"Given the timing of the drop-off in business investment," he said, "you have to think it's not just a coincidence with the timing of the fiscal cliff."
Unless the business investment slowdown reverses quickly, it could weigh further on growth prospects and the stock market.
Collectively, the members of the Standard & Poor's 500-stock index spent $580 billion on plants and equipment in 2011, according to calculations by the Journal from data supplied by S&P Capital IQ. Spending has run ahead of that pace throughout the year but has slowed in recent months. The latest retrenchment includes such household names as Wal-Mart Stores Inc., WMT +1.10% Ford Motor Co., F +3.24% Boeing Co., BA +1.57% Intel Corp. INTC -0.21% and Walt Disney Co. DIS +0.69%
During the 2007-09 recession, businesses cut back sharply on all kinds of spending. But investment helped propel the recovery, growing faster than the rest of the economy from the second half of 2009, once the recession ended, through the first half of this year. That helped many companies boost productivity and profits without adding new workers.
The Fiscal Cliff
If Congress doesn't reach a budget deal, the U.S. will see across-the-board spending cuts and tax increases for nearly everyone beginning in January 2013. Follow all of the Journal's coverage in The Fiscal Cliff stream .
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The pattern changed in the third quarter, when business investment fell at a seasonally adjusted annual rate of 1.3%, according to a preliminary estimate from the Commerce Department. The latest drop included a decline in investment in structures, such as buildings, at a 4.4% annual rate. Investment in equipment and software stalled after growing at a roughly 5% annual pace in the first six months of the year.
"We have really not seen tailwinds to the economy," said OfficeMax Inc. OMX +1.68% chief executive Ravi Saligram. "When that happens, American businesses focus on productivity. You always prepare for the worst and if things get better, that's great."
The slowdown in capital spending contrasts with a rebound in U.S. consumer spending and confidence, which has returned to a five-year high. Meanwhile, the latest survey by the Business Roundtable, which tracks expectations for sales and investment among its big-company CEOs, found the worst sentiment about the economic outlook in three years.
Consumers may be taking their cues from signs of stronger job growth, lower fuel prices and an improving housing market. Businesses, on the other hand, appear more worried about the future, as profit growth and the global economy slow and the outlook for U.S. government policies remains murky.
The mood appears better among small businesses than large corporations. A survey by the National Federation of Independent Business in October found an uptick in capital spending among small businesses. While overall sentiment among small businesses remains below its prerecession average, it has been resilient in recent months.
Snap-on Inc., SNA +2.39% which makes equipment for auto technicians, reports healthy investment among the 800,000 small businesses it serves across the U.S. "Their confidence is fair and reasonable," said Snap-on CEO Nicholas Pinchuk. "As you move up to bigger companies, their foresight becomes broader and their confidence starts to erode."
Slower global economic growth also is contributing to the investment slowdown. China for example, has reduced demand for coal and other minerals, slowing orders for earth-moving and other equipment from Caterpillar Inc. CAT +2.00%
At the start of the year, Caterpillar expected to spend $4 billion building and expanding factories in Illinois, North Carolina, Texas, China and Thailand, among others. Last month, Caterpillar said it wouldn't reach that target, and expects capital spending to fall next year.
In technology, Intel is facing lower demand for its semiconductors. Intel last month said it would shift idle factory space and equipment into producing its newest chips, reducing its capital spending this year to roughly $11.3 billion, from an earlier projection of $12.5 billion. Chief Financial Officer Stacy Smith told investors last month that spending could fall again next year.
Other technology companies buying less new equipment include Texas Instruments Inc. TXN +1.92% and Harris Corp., HRS +0.30% which has cut capital spending by 46% so far this year, to $44 million from $82 million. Apple said it planned to spend $10 billion on new stores and equipment in the current fiscal year ending Sept. 30, 2013, down from $10.3 billion in the 2011-2012 fiscal year.
Among the companies cutting capital-spending targets, the biggest concentration is in the energy industry, where natural-gas prices are near record lows.
Devon Energy Corp. DVN +1.72% spent $6.2 billion in the first nine months of this year, up 13% from the same period last year, with boosted spending on oil projects.
But capital spending next year will be "significantly less than 2012," particularly in acquiring new leases, Devon chief executive John Richels told analysts.
Write to Sudeep Reddy at email@example.com
and Scott Thurm at firstname.lastname@example.org
Corrections & Amplifications
Harris Corp. is a government contractor that makes technology products. An earlier version of this article incorrectly described Harris as a semiconductor company.
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