Many U.S. businesses too uncertain to spend Tue Aug 2, 2005 4:07 PM BST By Andrea Hopkins
WASHINGTON (Reuters) - The kitchen-and-bath business has been very good in the last few years for Russ Diamond. But like many U.S. executives these days, the president of Snyder Diamond is socking away profits instead of spending on new projects or equipment.
"We're always looking for opportunities, but I think we're all a little hesitant," said Diamond, the second-generation overseer of a 50-year-old business in the Los Angeles area.
Specializing in luxury items for kitchens and baths, Snyder Diamond owes its success to its close ties to the real estate boom -- and like many Americans, Diamond is not sure how long the good times can last.
"In the last year or two, you keep waiting for the other shoe to drop. I don't know, maybe people are growing money on trees in their backyard, but ... there has to be some break in the action," Diamond said.
Uncertainty about the strength of the economy tops the list of things executives worry about when they decide when or how much to spend on new equipment, expansion or hiring.
Talk of a housing bubble, high energy prices, rising interest rates and the risk of terrorism have fuelled worries about future demand.
Data released on Friday showed U.S. growth slowed to a still-solid 3.4 percent annual rate in the second quarter from the 3.8 percent clip of the first three months of the year.
Growth in capital investment has only just begun to catch up to growth in profits and cash flow. That cautious approach has left corporate America with a hoard of cash as chief executives wait for a better opportunity or a surer thing.
"I think the issue is that firms are very cash-rich right now. They have not, as it were, fully extended themselves," said Martin Regalia, chief economist at the U.S. Chamber of Commerce. "If they think that they want to invest, they want to grow -- but they're just a little unsure about the economic outlook -- then they'll husband their cash and wait a while."
GOTTA SPEND IT TO MAKE IT
U.S. business investment grew 9.4 percent last year -- strong by most measures but below the 11.3 percent growth in profits. In 2003, the gap was even sharper, with investment up just 1.3 percent despite a 15.3 percent surge in profits.
Top U.S. forecasters predict more of the same this year. The Blue Chip Economic Indicators newsletter, which compiles a consensus from more than 50 professional forecasters, predicts 9 percent growth in business investment this year, a fraction of the predicted 15.6 percent growth in profits.
Federal Reserve Chairman Alan Greenspan told Congress on July 20 that 2003 was the first time since the severe recession of 1975 that capital expenditures fell below cash flow. He blamed the shortfall on "business caution" in the wake of corporate scandals and stock market declines early in the decade.
Businesses have not always been so reluctant to spend. In the late 1990s, money was thrown at any opportunity to expand to meet the surging demands of the boom. The extra capacity created by technology spending has been credited with huge gains in productivity, which have allowed business to boost output without adding workers. Some companies may still be working off that glut in investment.
However, the spending spree has also been blamed for some of the corporate malfeasance that marked the excesses of the boom. Business groups say increased regulation put in place to prevent future misconduct has left many executives gun-shy about pouring money into projects that may not pan out.
"I think there is an underlying concern that risk-taking which equates with failure is going to equate with enforcement," said John Castellani, president of the Business Roundtable lobbying group.
The caution can come at a cost, Greenspan warned: "Higher levels of investment relative to consumption build up the capital stock and thus add to the productive potential of an economy."
In other words, you have to spend money to make money.
Still, the extra cash in corporate America may bode well for the future. While Castellani said he has lost count of the number of companies that have increased their dividends -- effectively returning cash to shareholders -- the remaining stockpiles have left executives well-placed for the next spending spree.
"There is a lot of good news in this," he said. "We've got a lot of cash, and so when the market opportunities, the technology opportunities, the investment opportunities that are going to cause the economy to take off occur, we've got the cash ready to invest."
Market Data 
Markets 
AI
