Low corporate investments may sap job growth in US

WASHINGTON/PARIS: A slowdown in business investment that the Federal Reserve expects to end without much damage to the economy may instead linger long enough to hurt job growth. Business spending may be a significant overlooked risk to the Fed’s forecast of moderate economic growth this year, economists say. When spending growth tapers off, a slowdown in hiring almost always follows, according to researchers at Commerzbank.

“The weakness in capital spending is alarming,” says Joseph LaVorgna, chief US economist at Deutsche Bank Securities in New York. “If capital spending is weak and getting weaker, the next thing companies will do is slow hiring.”

Fewer new jobs would mean less consumer spending, deepening the malaise in a US economy already burdened by slumping housing demand. The combination might force the Fed to shift its focus more toward shoring up growth.

Fed policy makers, led by chairman Ben S Bernanke, last week stuck to their view that the economy will keep expanding “at a moderate pace.” Their most recently published minutes, from the January meeting, indicated that while business investment had proven weaker than anticipated, they still expect improvement before year’s end.

Private economists may not be so sanguine. They have cut their forecasts of business spending three times since December, and now expect it will grow this year at the slowest pace since 2003, according to surveys by Blue Chip Economic Indicators.

That’s after expenditures on equipment and software fell last quarter by the most in four years.
“With so much attention on the housing market, this is perhaps a serious risk that’s flying under the radar,” says Brian Sack, a former Fed economist and now VP of Macroeconomic Advisers in Washington.

The Fed’s statement last week said inflation remains the main risk to the economy, even as policy makers dropped their bias toward raising interest rates. The change gives them room to manoeuvre in case the economy slows more than they expect.

Some suppliers of business equipment say the Fed’s optimism about investment may yet be borne out. “I’ve seen a significant change in optimism recently,” says Roland Chalons-Browne, chief executive officer of Iselin, New Jersey-based Siemens Financial Services, the commercial-finance unit of Siemens. “The hesitancy that has been in the marketplace is disappearing.”

US businesses have no shortage of funds to invest, thanks to a five-year surge in earnings that took profit margins at non-financial corporations to the highest level in 37 years in the third quarter of 2006, according to the Commerce Department.

Some companies would rather use their cash to purchase their own shares than invest it in new plants or expanding payrolls. Last year, non-financial companies retired a record $602.1 billion of equity through buybacks and other means, according to Fed statistics. That’s up 66% from $363.4 billion retired in 2005.

Houston-based ConocoPhillips, the third-largest US oil company, plans to quadruple share buybacks this year to $4 billion while cutting its capital budget 25%. This year, profit growth is slowing as margins shrink. Analysts surveyed by Bloomberg News see per-share earnings growth among S&P 500 companies slowing to 6.8% this year from 16.6% in 2006.

Seattle-based Amazon.com, the world’s biggest online retailer, announced this month that it will slow spending on technology after its profit margin fell to the lowest since 1999.

“When earnings growth slows and margins narrow, American business is very quick to cut back on expenses,” says Allen Sinai, chief global economist at New York-based Decision Economics Inc. “If this turns out to be a case of business- sector-initiated weakness, the Fed will be late in defending the economy.”

The Blue Chip survey shows business fixed investment may rise 4.3% this year, the slowest pace since 2003. That forecast is down from a 6.2% rise estimated in December.

“Once investment spending slows, job growth tends to follow,” says Patrick Franke, an economist at Commerzbank in Frankfurt. He says capital spending is “decisive” in any change in direction for the economy “because it is closely connected with trends in the labour market.”

LaVorgna says he expects monthly payroll growth to slow to an average 50,000 to 75,000 by year-end, from 189,000 in 2006, pushing the unemployment rate up to 5% from 4.5% now.

A Manpower survey of 14,000 companies this month showed employers plan to slow hiring next quarter. Construction companies and makers of durable goods plan to trim hiring the most, according to Milwaukee-based Manpower, the world’s second- largest provider of temporary workers.

The US economy will probably avoid a collapse in capital spending like the ones that occurred in 1982, 1991 and 2001, says Franke. Still, “a significant flattening” is likely, with investment growth of around 4% this year, he says.