A pullback in businesses' capital spending bodes ill
The parade of capital spending cuts may feed the economy's downturn. Many firms' optimism for 2009 evaporates.
Pat Dahlson's wholesale flower business was blooming last year. He expanded from Los Angeles to Detroit, Cincinnati and other cities. He put more workers on the payroll, added trucks to his distribution fleet and dreamed of even more expansion.
Then came the credit crunch. And the Hollywood writers strike. And sky-high gas prices. And collapsing consumer confidence.
Business at Dahlson's Mayesh Wholesale Florist began to wilt. This year, he'll slash his spending on expansion and improvements by two-thirds. He's already laid off more than 50 workers, or about 15% of the payroll.
"We had been ramping up and we were throwing human resources at our growth, and then we hit the wall in late fall," Dahlson said of his company, which had sales of $58 million last year. "We've had to pull back this year, just for the sake of trying to be smart about expansion."
As the U.S. economy teeters on the brink of recession, the biggest question mark has been the health of the consumer, whose hunger for cellphones, superhero movies, designer jeans and other goods and services accounts for about two-thirds of the nation's gross domestic product.
But some economists are increasingly worried about a slowdown in capital investment by businesses, which spend vast sums on everything from office buildings and fleet vehicles to software programs and telecom equipment.
Recently there has been a parade of sobering announcements: JetBlue abandoning markets and delaying aircraft orders, Starbucks closing 600 outlets, retailer Mervyns filing for bankruptcy protection and J.C. Penney scaling back next year's store openings.
Total planned capital spending by U.S. business declined on a year-over-year basis for four straight months through June, according to the Conference Board, the New York-based economic research firm. The Commerce Department reported Thursday that investment in software and equipment -- which accounts for two-thirds of business capital spending -- fell again in July.
Business investment, which sends out ripples of financial stimulus like a pebble tossed in a pond, is a leading indicator of the nation's economic well-being. So the recent run of bad news bodes ill for the future, some experts say.
"Almost universally, business spending is being scaled down to the absolute bare minimum," said economist Ken Goldstein of the Conference Board. "A few months ago, all those people were talking about a second-half recovery. If there's a second-half recovery, it's the second half of '09."
