The reasons businesses are putting off investment decisions have less to do with possible war in Iraq and more to do with business fundamentals
Most news stories on the outlook for business spending in 2003 come complete with the caveat that investment is being held back because of 'uncertainty surrounding a possible war with Iraq''.
This observation triggers a sympathetic nervous-system response in me. A potential war with Iraq may deter building infrastructure in the Middle East. It shouldn't have anything to do with a US company's decision to upgrade its information technology systems, improve the efficiency of manufacturing plants or develop new products.
If a war in the Middle East leads to a nuclear dark winter, presumably no one will care one whit when a company reports a big quarterly loss, so maybe the possible repercussions from a war aren't the best basis for investment decisions.
If I had to guess, I'd say some reporter asked a chief financial officer about capital spending plans, the CFO needed an excuse ('improving the bottom line'' is suspicious in this post-Enron environment), and it became gospel.
'Spending capital dollars is determined by three things,'' says Norbert Ore, chairman of the Institute for Supply Management's business survey committee for manufacturing and group director for strategic sourcing and procurement at Georgia-Pacific. 'The first is to add to capacity. The second is new technology. The third is new products. War doesn't necessarily stop any of those three.''
Capacity is abundant right now. The nation's factories, mines and utilities operated at 75.6% of capacity in November, according to the Federal Reserve's latest report on industrial production.
That's 5.9 percentage points below the average for the last 30 years. No screaming need to build a new plant at this point. New technology continues to be a driver of capital spending. Yesterday Intel said capital spending for 2003 is expected to be between $3.5bn and $3.9bn, compared with $4.7bn in 2002. There was no mention of war with Iraq.
The world's biggest computer-chip maker has spent $14bn in the last two years building and equipping plants to produce a new generation of computer chips with '2.5 times more output per wafer for 30% less,'' says Intel spokesman Chuck Mulloy. 'You cannot forecast based on what may or may not happen in Iraq. All our decisions are based on business fundamentals.''
The over-investment of the late 1990s is the main reason for the slump in capital spending, according to Al Lubrano, president of Technical Materials, a Lincoln, Rhode Island, manufacturer of custom metal systems for high-tech industries.
'People who service high-tech industries find themselves with excess capacity,'' Lubrano says. 'Iraq has nothing to do with whether we spend on capital. That decision is based on capacity and technology''.
Technical Materials' capital expenditures last year were about 15% of what they were in 1998 and 1999, Lubrano says. Yet when there's a 'technological breakthrough'' on equipment that 'takes the cost out of production, I'm always willing to spend,'' he says.
Just this month he invested in a piece of equipment that takes the stress out of materials and runs up to six times faster than older equipment.
New products are another reason for companies to invest. Ford Motor's chief executive officer, William Ford, reiterated that the automaker won't cut investment on new-model development, which is key to the company's revitalisation plan.
Ford expects to invest $8bn in 2003, up from $7bn in 2002. The idea that war is holding back spending is not totally without merit, according to Henry Willmore, senior US economist at Barclays Capital Group.
'You can't reverse investment,'' Willmore says. 'If you postpone it, you can always proceed later. Businesses don't want to make an investment only to find out it's not economical.'' War with Iraq may present a convenient shorthand for the myriad reasons companies aren't investing.
'On some level, you could say that companies held back for reasons tangentially related to war with Iraq,'' says Darren McKinney, director of media relations for the National Association of Manufacturers. 'Before the terrorism insurance bill was passed late last year, it depressed investment in real estate.''
If Ore's triumvirate of reasons for investing, more capacity, new technology and new products, is correct, Iraq starts looking more like an excuse than a reason.'Let's just say that our members aren't afraid that war will wreak devastation on the US economy,'' McKinney says.
In fact, many manufacturers stand to benefit from the post-war effort at nation-building, which will require roads, food, medicines, etc.
Uncertainty is a fact of life, one we live with all the time. Nothing was certain when the Nasdaq Composite Index was trading at 5,000. In fact, it was the misplaced expectation that the era of good times would last that got us into the mess we're in.
Look at the positive side: If the myth that war with Iraq is restraining investment is correct, it means that there will be a lot of pent-up demand once the 'uncertainty'' is removed. Maybe companies need to prepare for that eventuality.
Bloomberg New York newsroom
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