More CEOs Plan Capital-Spending Cuts as Fiscal Cliff Nears

Wednesday, 12 Dec 2012 04:43 PM

 

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The number of U.S. chief executive officers planning to trim capital expenditures has risen amid the political standoff over more than $600 billion in federal tax increases and spending cuts, the Business Roundtable said.

A survey conducted by the Washington-based CEO group from Nov. 12 to Nov. 30 found that 23 percent expect their companies to reduce capital spending during the next six months, according to a statement Wednesday. That increased from 19 percent in a survey completed in September.

“The uncertainty about the fiscal and monetary environment and the budget environment that we find ourselves in is putting a damper on investment,” Jim McNerney, chairman of the Business Roundtable and CEO of aircraft manufacturer Boeing Co., told reporters Wednesday on a conference call.

The standoff between President Barack Obama’s administration and congressional Republicans over the fiscal cliff is causing concern at companies ranging from Ford Motor Co. to Wal-Mart Stores Inc. to Pandora Media Inc. Failure to reach an agreement would trigger higher taxes and reduced government spending beginning in January.

Ford, the second-biggest U.S. automaker, reiterated on Dec. 3 that it was making contingency plans in the event that the talks falter. Wal-Mart CEO Mike Duke said in an interview Tuesday that 15 percent of customers at the world’s largest retailer “are telling us this discussion about the fiscal cliff will affect what they spend on Christmas.”

‘Significant Frustration’

The results of the Business Roundtable’s survey, which included responses from 143 chief executives, reflect “significant frustration over Washington’s inability to achieve a market-credible solution,” McNerney said. They show that CEOs “anticipate continued slow overall economic growth,” he said.

Not all outlooks for business investment are as pessimistic. Manufacturers project they will invest more next year than this year, according to the Institute for Supply Management’s semiannual survey released Tuesday. Orders for capital equipment excluding defense and aircraft rose 2.9 percent in October, the biggest increase since February, Commerce Department data showed Nov. 27.

Obama, insisting America’s wealthiest pay more in taxes, reduced his demand for tax increases to $1.4 trillion from $1.6 trillion as he and House Speaker John Boehner Wednesday traded another round of offers to end the standoff.

Obama got a firsthand look at CEOs’ frustrations on Dec. 5 when he, along with about 105 of the corporate leaders, attended a meeting of the group in Washington.

‘Enormous’ Consequences

FedEx Corp.’s Fred Smith said almost all of the chiefs raised their hands when John Engler, the group’s president, asked whether they would reduce capital spending if the federal talks fail.

“You have the largest employers in the country raising a hand,” Smith said at a Dec. 6 conference in Washington. “The consequences of going over this fiscal cliff are enormous.”

A failure of negotiations may push the U.S. back into negative growth and roil markets, AT&T Inc. CEO Randall Stephenson said in a Nov. 30 statement.

Jamie Dimon, JPMorgan Chase & Co.’s chief, said the U.S. economy is set to thrive in 2013 if lawmakers reach an accord.

“You might have a booming economy in a couple of months” with growth accelerating to 4 percent rather than 2 percent, Dimon said today at an event in New York hosted by the New York Times’s Dealbook. With unemployment falling and housing on the rebound, “the table is set very well right now.”

In Stages

A resolution may come in stages after Jan. 1, the trigger date for spending cuts and tax increases, forcing companies to grapple with uncertainty for several months, said Stanley Nabi, vice chairman of Silvercrest Asset Management Group in New York.

“Any resolution of the fiscal cliff is not going to be tied up neatly with a bow,” said Frederic Dickson, who helps manage $32 billion as chief investment strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.

Dickson put at 80 percent the probability that some topics such as tax rates won’t be resolved by the end of the year. There’s a 50-50 chance that tax rates on dividends and capital gains will expire, leading to higher rates, he said.

Ford wants “to be able to adjust our production appropriately and make sure we have the right amount of liquidity” should the political standoff not be resolved, Mark Fields, the automaker’s chief operating officer, told reporters at the Los Angeles Auto Show on Nov. 28.

Cautious Advertisers

For Pandora, the Internet radio company, the uncertainty has made advertisers cautious and may lead them to delay spending by a quarter or two even if the fiscal cliff is averted, CEO Joe Kennedy said in a Dec. 4 interview.

Advertisers are concerned “about the effect the fiscal cliff will have on growth, and it’s reduced our visibility,” he said. “When our clients are cautious, we have to be cautious.”

Spending already shows signs of slowing. Business investment in equipment and software dropped at a 2.7 percent annual rate in the third quarter, the worst performance since the three months ended in June 2009, when the recession ended, according to Commerce Department data.

“The fourth quarter will continue to be slow and there could possibly be a spillover into the first quarter,” as companies curb capital until tax rates are set, Dickson said.

The possibility of higher income taxes is a concern for small business owners who pay taxes on their business profits on their individual returns.

“Many of my franchisees are holding back off any expansion because they don’t know what taxes they’re going to pay,” said Catherine Monson, CEO of closely held Fastsigns International Inc., a franchisor of 470 signs and graphics stores in the U.S.

“They are sitting on the sidelines, not adding new positions and not buying new equipment workers, because of this horrible uncertainty,” Monson said in an interview Dec. 10. “Hiring new workers and buying new equipment are economic drivers. What we right now are jobs, jobs, jobs.”

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