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Slide in Capital Spending Signals Anxious Outlook

Economy: Many California businesses are reducing investment in plant, equipment and staff in response to impact of global woes.

October 17, 1998|DON LEE | TIMES STAFF WRITER

Heralding leaner economic times ahead, more and more companies in California are cutting jobs, ratcheting down investment in their businesses and taking other belt-tightening measures not seen since the last recession.

The cutbacks, which have accelerated in California and nationwide in the last few months, largely reflect Asia's growing toll on U.S. corporate profits, the gyrating stock market and widespread expectations of a downturn next year. In the last month alone, major California employers such as Arco, Chevron, Hewlett-Packard, Packard Bell and Boeing have announced reductions in staffing or capital spending--or both.

Capital spending, or expenditures for plants and machinery, has been a driving force in the nation's long economic expansion, along with exports. But both have faded this year.

The Federal Reserve Board's unexpected cut in interest rates will help, bolstering confidence, as it did on Wall Street this week. It will also be cheaper for businesses to borrow for expansion. Even so, the Fed's action isn't likely to greatly influence corporate decisions on capital purchases, given the uncertain economic outlook.

The Fed's short-term rate cut, to 5% from 5.25%, "will help mitigate the slowdown in business investments, but it's not going to have a large direct effect," said Ross DeVol, an economist at the Milken Institute in Santa Monica.

Most manufacturers don't need a lot of new equipment and machinery right now because their existing stock isn't being fully utilized. U.S. factories were running at 79% capacity last month--the lowest since September 1992.

Take Santa Ana-based Express Manufacturing, one of the state's largest electronics assembly firms.

Until earlier this year, co-owner C.P. Chin said his company had expanded aggressively, adding two buildings, millions of dollars in equipment and 300 workers over the last three years. But now, with competition from Asia increasingly pinching his sales and profit, Chin's plants are running at just 65% capacity. He says he hasn't laid off workers, but he's retreating from further hiring and capital spending.

"We need to get to 85% to 90% capacity, then we'll start adding new equipment," he said. When might that be? Like most business owners, he has no idea. His best guess is short-term. "The way it looks now, we think we'll be more affected by Asia early next year."

Chin is better off than many in the high-tech sector, particularly in Silicon Valley, where one company after another has been hurt by shrinking demand from Asia and has responded by slashing jobs and other costs.

Hewlett-Packard, the giant computer maker in Palo Alto, began this spring with small, mostly symbolic cuts, such as canceling company picnics. Then, in the summer, middle managers took a 5% pay cut for three months. Two weeks ago, the company moved to trim 2,500 jobs by offering a voluntary separation plan.

Nationwide, electronics and computer firms have led the job cuts, accounting for about one-fourth of the 431,500 positions eliminated between January and September, according to Challenger, Gray & Christmas, a Chicago outplacement firm. That includes 71,000 jobs erased by California companies, although not all the workers are in this state. That is the highest since at least as far back as 1992.

Even so, California thus far has more than weathered the recent flurry of layoffs, as other businesses, mostly in the service and housing industries, have kept on hiring. Overall, statewide job growth has slowed but still averaged 24,000 a month in the third quarter.

Other indicators also point to a California economy that is still healthy. Consumer confidence, while slipping lately, remains fairly high. Through the first half of this year, personal income and retail sales continued to rise ahead of the nation.

Also, companies like supermarket chain Stater Bros. and CKE Restaurants, the operator of Carl's Jr., are planning significant expansions next year, reflecting California's robust outlook for population and housing growth.

Jack Brown, chairman of Colton-based Stater, a $2-billion chain with 112 outlets in the Southland, said he is budgeting a 50% boost in business investments next year. "If we don't acquire any, we'll build six new stores," he said.

But companies like Stater are increasingly in the minority. Most businesses, including the service sector, appear to be reducing capital spending, fearing a marked slowdown in the U.S. economy next year, possibly even a recession. For others, the pullback isn't so much a reaction to Asia or Wall Street but more a pause after a long expansion.

Whatever the case, the overall effect will be substantial.

"It is worrisome," said Esmael Adibi, an economist at Chapman University in Orange, who estimates that growth in U.S. business investment will amount to no more than 3% this year, after booming at 8% to 10% annually during the preceding four years.

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