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Wed, Jul 23, 2003 - Page 12 News List

Big spenders bet on US recovery

FAITH-BASED RECOVERY Chief executive officers of many large US companies are committed to increasing capital spending, reducing a major drag on the US economy

BLOOMBERG

Business investment, long blamed for holding back the economy, is showing signs of firming along with chief executive officers' faith in a second-half recovery.

Many of the economy's big spenders -- including General Motors Corp, Home Depot Inc and Intel Corp -- are vowing to proceed with capital-spending plans set at the start of this year.

A year ago, companies were cutting investment budgets as sales soured. Intel last week said it is sticking with plans to invest US$3.5 billion to US$3.9 billion this year after cutting its capital program by US$800 million, or 15 percent, during last year.

"I definitely see light at the end of the tunnel," EMC Corp chief executive officer Joseph Tucci told investors last Wednesday. EMC is the world's third-largest maker of computer data-storage systems.

"Budgets are still tight, but being spent, as opposed to last year when budgets were tight and CEOs turned back dollars to help with the bottom line," he said.

While consumer spending has kept the economy expanding since the 2001 recession, business investment has languished, holding growth almost a percentage point below the 50-year average of 3.3 percent.

Business fixed investment, which accounts for 13 percent of GDP, declined at a 4.4 percent annual rate in the first quarter, the ninth drop in 10, as the economy grew at a 1.4 percent pace.

Federal Reserve chairman Alan Greenspan considers the drop in business investment a significant drag on the economy because it is an engine of job creation. Since the recovery began in November 2001, 1.2 million payroll positions have disappeared. When companies such as Intel cut their investment plans, it forces scores of companies that build equipment for computer-chip plants, such as Applied Materials Inc, to reduce their budgets.

Capital spending is a "crucial issue" to the strength of the expansion, Greenspan told the Senate Banking Committee last Wednes-day. Even as industrial production edged up 0.1 percent in both May and last month, capacity use held at 74.3 percent, the lowest in 20 years.

"Should firms begin to perceive that the pickup in demand is durable, they doubtless would be more inclined to increase hiring and production, replenish depleted inventories, and bring new capital on line," Greenspan said. "Tentative signs suggest that this favorable dynamic may be beginning to take hold."

Three-quarters of the CEOs polled this month by the 150-member Business Council said they expect their capital spending over the next six months to equal current amounts, up from 55 percent in April.

The proportion of companies forecasting a drop in spending fell to 12 percent from 27 percent, and 14 percent said they plan to spend more. The Business Council's member companies have combined revenue of US$3.7 trillion.

Part of the higher confidence is coming from a brighter outlook for sales. EMC said higher demand for its equipment, software and services boosted sales 6.6 percent in the second-quarter, led by a 12 percent gain in North America. The company's customers include Delta Air Lines Inc, Ford Motor Co and American International Group Inc.

"Capital spending is starting to accelerate," Tucci said in a conference call from EMC's headquarters in Hopkinton, Massachusetts.

Some economists don't see it that way. Ian Morris, chief US economist for HSBC Securities USA Inc, said "the consensus expectation for a second-half revival is set for huge disappointment," mainly because business investment is "likely to continue floundering."

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