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Is corporate spending finally poised to accelerate?

Posted: Friday, February 06, 2004

NEW YORK (AP) Now that corporate America's profits have bounced back, will companies finally loosen their purse strings and start spending again?

For the economy's sake, the answer has to be yes. We need to see a big upswing in capital investments. And there might be reason for it to happen: old equipment needing replacement, rising demand for products and tax incentives could all spur spending.

It's particularly important now that we can't count on consumers anymore to keep the recovery going.

They've done their part, buying houses, clothes, cars and everything else even when times were tough during three years of economic troubles and stock market turbulence. But with their debts mounting, there are some hints that pace may be slowing.

So that's shifting the burden to businesses, which have largely held off on making big purchases in recent years and instead have just stashed their cash. In fact, the gap tallied in the third quarter between capital expenditures and cash holdings was the widest it has been since the Federal Reserve started keeping track in 1952.

Alcoa is an example. The aluminum producer last year put forth a smaller-than-expected $867 million on capital expenditures, the lowest since 1994. Like many companies, it used cash to pay down its debt.

But that way of doing business won't last for long. Alcoa CFO Richard Kelson said the company can't sustain that low capital spending rate, and is budgeting $1 billion to spend in 2004, according to a transcript of the company's conference call with analysts that was provided by CCBN StreetEvents.

Alcoa isn't alone. A survey in December by The Business Roundtable, an advocacy group of chief executives from some of the nation's biggest companies, found that 35 percent expect to increase their capital spending over the next six months. That's up sharply from the 23 percent that planned to boost spending when surveyed in October.

Some companies are just ready to replace or repair their equipment, since they haven't done so in long while. The average age of equipment at companies in the Standard & Poor's 500 index was 6.34 years at the end of the third quarter of 2003, which was 11 percent higher than the five year average of 5.74 percent, according to a recent report by Merrill Lynch.

Demand is also on the rise, thanks to improvements in the stock market and the economy.

Microsoft has said that its customers both computer manufacturers and companies investing in new technology are beginning to bite again, while General Electric has seen an increase in orders for such things as medical equipment, aircraft engines and appliances.

''It really is the broadest orders strength we've seen probably since 2000,'' GE CEO Jeffrey Immelt said when the company announced its quarterly earnings last month. ''We're really seeing a broad pickup in demand which I think gives us good momentum going into next year.''

Use-them-or-lose-them tax incentives could also spur big spending over the next year. Under a provision in Bush's 2003 tax cut plan, companies can write off 50 percent of a capital investment when it's bought, thus reducing their tax bill.

The catch: they need to make their purchases by Dec. 31, 2004, or else the rules go back to the old ways of companies expensing assets over the lifespan of the item, which can run for many years.

''We believe this could touch off a late-year pre-Y2K style business spending sprees as CFOs convince management that it is cost effective to spend part of the '05 budget in late 2004,'' the economics team at Merrill Lynch wrote in a recent report to clients.

Still, new forklifts and computer terminals aren't the only thing vying for corporate dollars. The market is buzzing about the resurgence in mergers and acquisitions, which have just started to pick up after a three year slump. Companies may also decide to give some of their cash back to shareholders in the form of dividends, or launch stock buybacks.

No one is doubting that corporate America is flush with cash. It's just how it's spent that's going to matter.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org



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