Seeing Economic Rebound, Firms Step Up Spending

¹²Seeing Economic Rebound, Firms Step Up Spending

By Justin Lahart and Kris Maher, WSJ | 25 June 2010

Companies are stepping up spending on equipment as the recovery that first took hold in manufacturing broadens to other areas of the economy. Spending on such capital goods fell sharply during the recession, and even now, businesses remain cautious as they eye turbulence in Europe and worry that the recovery could still stumble. But with demand for goods around the world continuing to rise, that uncertainty is being trumped by concern about getting left behind.

"We're seeing global commerce expand and as a result we want to be very aggressive in our international expansion," said Alan Graf, chief financial officer at FedEx Corp. "We're back on the offensive". The Memphis-based shipping giant plans to spend $3.2 billion on equipment and facilities in the fiscal year that began this month, up from $2.8 billion last year. "Two thirds is for growth and only one-third is to maintain our current business, so we're very bullish," said Mr. Graf.

FedEx says it will buy more of Boeing Co.'s 777 airplanes to help serve its busy U.S.-Asia routes. It also is building more sorting facilities for its U.S. ground network, spending on new technology and pulling back into service jets that it had parked in the desert during the downturn. A Commerce Department report Thursday showed that orders for durable goods— items expected to last at least three years— fell 1.1% in May from April, a drop that was driven by a decline in often-choppy aircraft orders. But a key measure that economists watch to gauge capital-spending plans— nondefense capital-equipment orders excluding aircraft— rose 2.1% and was 18.4% above its year-earlier level.

There remain significant clouds on the economic horizon. As the Federal Reserve said earlier this week, business spending on equipment and software "has risen significantly," but it also noted that financial conditions "have become less supportive of economic growth". "Where we go from here is somewhat muddied," said Jim O'Sullivan, an economist at MF Global. "We've seen turmoil in the markets and I think that's going to lead to at least some temporary loss of momentum."

Dean Maki, an economist at Barclays Capital, pointed out that corporate profits in the first quarter were up 30% from a year ago. In the past, whenever profits have risen that much, it has created a competitive dynamic where companies have felt they need to spend and hire to keep pace with rivals. "The only way to increase your market share is through investing and hiring," he said. "You can't do it by sitting around."

3M Corp., which makes things ranging from Post-it Notes to surgical masks, plans capital spending of up to $1.2 billion this year, compared to $900 million last year. Among other things, the St. Paul, Minn., company is building a new plant in Singapore to make films for solar panels. Demand at an existing plant there has grown over 100% for the past several quarters. 3M CEO George Buckley said at an investor conference earlier this month that the company has seen other upside "surprises" in demand, including in abrasives, electronics and the energy industry. "We are up against capacity in some of those areas," he said.

Makers of computer equipment and software have seen business pick up, too. In a conference call Tuesday, Timothy Main, CEO of contract electronics manufacturer Jabil Circuit Inc. in St. Petersburg, Fla., said: "Many companies delayed their procurement of [information technology]-related capital expenditures throughout the recession and there's certainly significant catch-up". Software developer Red Hat Inc., in Raleigh, N.C., saw 11 deals worth approximately $1 million or more in the quarter ended May 31, more than double what it signed a year earlier, said Charlie Peters, chief financial officer, in a conference call Wednesday.

Still, boosting capital spending is a white-knuckle decision for many companies. Europe's debt crisis has hurt financial markets badly over the past two months and threatens to stifle an economic recovery that through May looked like it was gathering steam. JB Brown, president of Bremen Castings Inc. in Bremen, Ind., said his board met earlier this week and gave him the green light to spend $5 million this year, mostly on new equipment, double the amount he spent last year. He said he still has concerns that the economy could turn south, but he has no choice but to invest now.

Bremen's sales fell 24% last year, but they are expected to be up 27% this year. Credit is much more available now than a year ago, Mr. Brown said. The company wants to diversify and automate its processes for making metal castings and machining parts, such as valves used by the military and in industries such as agriculture and heavy-truck manufacturing.

Manufacturing has been a key force in the U.S. recovery, boosted by increased demand from developing markets such as China, Brazil and India and a need to replenish inventories that were slashed during the downturn. Because manufacturing companies account for about a fifth of total U.S. spending on capital equipment, their rebound is creating ample demand. Engine-maker Cummins Inc. plans to boost capital spending to $400 million this year, up nearly 30% from 2009. The Columbus, Ind., company needs to meet increased demand being fueled by rising sales of trucks and off-road engines in India and China, and an expected increase in demand for fuel-injection and emission-control systems that can meet new air-quality and fuel-efficiency standards.

"Over the next five years we see a pretty significant amount of growth," said Mark Land, a Cummins spokesman. Welspun Corp., a Little Rock, Ark., maker of pipe used in the oil-and-gas industry, decided to pump an additional $30 million this year into a new Little Rock plant to increase its welding capabilities and build out its rail yard so it can load 40 rail cars a day, up from 20. With the recovery now rippling into parts of the economy other than manufacturing, other businesses are boosting spending as well.

Greensboro, N.C.-based Moses Cone Health Systems cut its capital spending to $45 million in its fiscal year ended last October, way under the $70 million to $90 million it usually spends, as revenue fell at the five hospitals it runs and the financial crisis made access to credit uncertain. "We delayed a lot of projects," said CEO Tim Rice. "This year we're more into a normal mode". Moses Cone is putting more money into health-care information technology and has also been expanding its emergency-care department.