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Analysis: Shaky economy has companies wary of spending

By Scott Malone and Mike Tarsala

BOSTON/NEW YORK (Reuters) - Weakening demand in the United States and Europe has spooked some in corporate America, prompting big companies to throttle back their spending just as U.S. government looks for ways to cut its own outlays.

That new wave of fears is threatening to choke off a fledgling resurgence in capital investment by big companies -- one of the few areas where economic activity was growing.

Chief executives and investors have been bombarded by a wave of bad economic news over the past few days, including a report that U.S. gross domestic product grew at a weaker than expected rate in the first half of the year and word on Wednesday that the rate of layoffs had picked up in July.

"We're looking at slower growth," said David Farr, CEO of U.S. manufacturer Emerson Electric Co, which recently warned that its order rates slowed in the past two months. "I can't tell you right now what the second half will be, I can't tell you what 2012's going to be, so don't bother to ask."

Still, that uncertainty is not stopping the blunt-talking executive from acting. He is already looking for ways to limit the St. Louis-based company's spending -- rather than planning to boost its budget by 5 percent next year, Farr now aims to increase outlays by just 3 to 4 percent.

He is not the only one sounding a cautious tone.

Sergio Marchionne, CEO of Chrysler and Fiat SpA, said the uncertain recovery in consumer demand for cars, also cited by General Motors Co, is making automakers wary.

"People are still very reluctant to make long-term commitments to R&D and capital because of the uncertainty," he told reporters at an industry conference on Wednesday.

Corporate spending is no better: Earlier this week SPX Corp, a maker of industrial components, surprised investors with a far weaker than expected third-quarter profit forecast, saying it was counting on a robust fourth quarter to hit its full-year target. That followed word last week from Juniper Networks Inc that the private sector and U.S. government are delaying purchases of network equipment.

RESURGENCE AT RISK?

The nervousness could dampen what had been a recent resurgence in corporate investment. Companies boosted their capital spending by about 21 percent in the first quarter and kept up a similar pace in the second quarter, putting them on a track for their biggest-spending year since 2006, according to a Reuters study of 3,153 U.S. companies.

That growth, however, lags the increase in money spent on stock buybacks and takeovers, which both rose more than 60 percent in the first half of 2011.

Engineering company Foster Wheeler AG also said its U.S. clients are holding off on committing to big construction projects, over worries about the economy.

"The delays are due to client concerns about the macro environment, specifically the political and economic uncertainties," said interim CEO Umberto della Sala.

The $2.1 trillion deficit-reduction plan reached in Washington this week spared the United States from defaulting on its $14.3 trillion debt, but raised questions on what spending would be cut, which in turn weighed on shares of companies that do everything from running nursing homes to building fighter planes.

"Where is the growth going to come from?" said Michael Goodman, director of economic and public policy research at the University of Massachusetts at Dartmouth. "It's not going to come from the private side and it doesn't appear like it's going to come from the public side. That does appear like a recipe for sluggish growth at best."

Sluggish growth is just what the United States has seen this year, with GDP up 0.4 percent in the first quarter and 1.3 percent in the second.

SHIFTING SPENDING ABROAD

Even companies that are spending are not necessarily making their investments in the United States.

"Our capex is increasingly shifting toward international markets and fast-growing developing economies in particular," said David Meline, chief financial officer at 3M Co.

The company expects its total capital spending to rise this year by about 27 percent, to a range of $1.3 billion to $1.5 billion, and plans to continue to raise that budget next year, in line with revenue growth.

Corporate caution will only represent a further weight on the economy, which has seen consumer spending depressed by a stubbornly high unemployment rate that has held near or above 9 percent for most of the past two years.

Companies have become increasingly unwilling to part with their cash over the past year, building up $1.9 trillion in cash and short-term instruments at the end of the first quarter, according to Federal Reserve data.

"You'll see firms hanging on to their cash even more than they already are," said Lee Pinkowitz, associate professor of finance in Georgetown University's McDonough School of Business. "Companies may start rushing to issue debt, to lock in, not because they have projects but because they're going to hold that cash."

The new caution raises worry in some economists' minds that the United States could slip back into recession.

"I'm not sure we're going to head back down into recession, but I would say the probability is higher now than it was a few months back," said Robert Murphy, a professor of economics at Boston College, who served as a White House adviser on the economy during the Clinton administration.

If the nation does slip back into recession, it could be some time before investors know, Murphy said. The United States was a full year into the last recession, which ran from December 2007 through June 2009, before the National Bureau of Economic Research officially declared its beginning.

"The good news for the president is we probably won't know until after the election, the way these things often get called," Murphy said.

(Reporting by Scott Malone and Mike Tarsala, additional reporting by Deepa Seetharaman in Traverse City, Mich., Nick Zieminski in New York, Braden Reddall in San Francisco and Manik Narula in Bangalore, editing by Matthew Lewis)

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