Analysis: Corporate America sweats as U.S. nears fiscal cliff
BOSTON (Reuters) - Top U.S. executives have less confidence in the business outlook now than at any time in the past three years - and a key reason is fear of gridlock in Washington over the fiscal deficit and tax policy.
The uncertainty, coupled with slowing demand in Asia and Europe, is forcing corporate leaders to postpone decisions on major investments and hiring, and hurting sales of everything from textbooks to telephone lines.
"If we don't deal with the fiscal cliff and don't deal with predictability on taxes for both citizens and business, with the rest of the world in a struggling state, this is really bad for us," John Chambers, CEO of network equipment maker Cisco Systems Inc (CSCO.O), told Reuters on Tuesday.
Some 34 percent of U.S. CEOs plan to cut jobs in the United States over the next six months, up from 20 percent a quarter ago, according to a Business Roundtable survey released on Wednesday. Only 30 percent plan to raise capital spending, compared with 43 percent previously.
The group's index of CEO confidence fell to its lowest point since the third quarter of 2009, when the United States had just emerged from its worst recession in 80 years.
The main culprit is the fiscal cliff -- Washington's self-imposed year-end deadline to agree on a plan to shrink the federal budget or trigger $600 billion in spending cuts and higher taxes that were put in place last summer.
The sharpest pain would be felt by the defense and healthcare sectors, which face direct funding cuts. But any resulting slowdown could send shockwaves across the economy.
Another survey, by Deloitte, found that chief financial officers' view of business prospects had also darkened in the current quarter. Some 80 percent of U.S. CFOs surveyed by the consultancy said the economy had stalled or was about to stall.
AT&T Inc (T.N) CEO Randall Stephenson said orders have slowed for new phone lines as corporations hire fewer workers.
"Businesses are taking action now in anticipation of January," Stephenson told investors last week.
The worries aren't limited to the private sector. Scholastic Corp (SCHL.O), publisher of the Harry Potter and Hunger Games series, said sales of books and teaching material to schools were dropping as districts rein in spending.
Officials from companies as varied as heavy-equipment maker Caterpillar Inc (CAT.N), retailer Home Depot Inc (HD.N) and Bank of America Corp (BAC.N) have raised concerns about what could happen on December 31.
Both Republicans and Democrats have suggested a more likely outcome may be a delay, in which lawmakers agree to shift their deadline into early or even mid-2013.
Executives warn that failure to compromise on the budget could undermine an unsteady world economy, which is also coping with Europe's debt crisis and slowing China growth.
"No recovery next year in the U.S. or in Europe (is) now forecast," Greg Hayes, chief financial officer of United Technologies Corp (UTX.N), told investors last week. "That assumes we don't fall off this fiscal cliff, which could be devastating to the U.S. economy, probably the world economy."
IN THE CROSSHAIRS
Lockheed Martin Corp (LMT.N), General Dynamics Corp (GD.N), Boeing Co (BA.N) and other U.S. weapons makers have been warning for over a year that uncertainty about the Pentagon budget, tax rates and the debt ceiling was dampening their ability to invest, hire new workers or commit to new acquisitions.
They have lobbied lawmakers to avert across-the-board budget cuts that would slash projected defense spending beyond $487 billion in cuts already agreed to beginning in fiscal 2013.
At the same time, most of the companies have accelerated their cost-cutting efforts, closing facilities, laying off workers and pressuring their suppliers to lower component costs. United Tech's Sikorsky helicopter unit on Monday said it would close a site in Elmira, New York, that modified Black Hawk and Sea Hawk helicopters, cutting some 575 jobs.
Hospitals, doctors, rehabilitation facilities and nursing homes are bracing for at least a 2 percent across the board cut in how much the federal Medicare program pays for services provided to the elderly and disabled.
Those expected cuts could reverberate throughout the health care industry. For healthcare insurers, including UnitedHealth Group Inc (UNH.N) and Aetna Inc (AET.N), it could mean that the hospitals and doctors turn to them to make up the difference.
"The bigger issue for them is how much cost-shifting are they going to experience," CRT Capital Group analyst Sheryl Skolnick said.
Developers of wind farms, solar fields and other renewable energy projects are facing a 7.6 percent mandatory cut to a grant program that has boosted the industry in the last few years. The program, authorized as stimulus spending in 2009, allowed renewable energy project owners to recover 30 percent of their construction costs in cash.
Arno Harris, CEO of solar project developer Recurrent Energy, said many of the U.S. solar installations coming online this year were relying on the cash grant program.
"Pretty much every large project that is probably being put into operation this year was probably qualified under the program last year," he said in an interview.
U.S. makers of electric-powered cars who had received loans under a $25 billion government program intended to encourage the development of more efficient vehicles are in somewhat better shape as most are not expecting more funding from the Energy Department. The government has not promised any new funding under that loan program since March 2011.
A TRILLION DOLLARS ON THE SIDELINES
Businesses have responded to the risks posed by the fiscal cliff in much the way they have reacted to all worries since the 2008-2009 financial crisis: by hoarding cash.
The companies that make up the broad Standard & Poor's 1500 index .15GSPC had $1 trillion in cash and equivalent assets on their books at the end of the second quarter, according to Thomson Reuters I/B/E/S data. That is a hefty sum in comparison to total U.S. gross domestic product, which last year came to $15 trillion.
The reserves reflect unease across corporate America, evidenced in both slow hiring and tepid pace of takeovers.
"Buyers remain reluctant to pull the trigger; continued economic and geopolitical uncertainty in the world are keeping companies from making big, bold bets," said Stefan Selig, executive vice chairman of Global Corporate and Investment Banking at Bank of America Merrill Lynch, who said the fiscal cliff is just one of several factors inhibiting deal making.
The irony of this problem is that corporations' unwillingness to spend is holding back the pace of growth.
"Companies have a lot of cash," Dave Cote, CEO of Honeywell, told investors. "There is an opportunity here to really unleash a big wave of investment ... But everybody is just cautious right now because you just don't know what democracies are going to do. And you look at whether it is the U.S., Europe, Japan, India, democracies are in gridlock."
Much of the fight in Washington over cutting the deficit revolves around taxes, with some Republicans opposed to tax hikes of any kind while some Democrats prefer to raise taxes on businesses and the wealthy to protect social spending programs.
Business leaders said they are open to raising some taxes if that leads to a budget deal, on the rationale that they are better off knowing the rules they will be operating by.
A study released on Monday by the National Association of Business Economics found that 45 percent of its members thought Congress should rely equally on tax increases and spending cuts to reduce the deficit, while just 9 percent were opposed to having any tax hikes aimed at cutting the deficit.
"Most of the CEOs would be characterized as pragmatic on this issue," Boeing Co (BA.N) CEO James McNerney told reporters on Wednesday. While CEOs favor spending cuts, he added, "We also realize there is some case for some revenue raises."
(Additional reporting by Ernest Scheyder in Las Vegas, Andrea Shalal-Esa in Washington, Caroline Humer, Nick Zieminski, Jim Finkle, Olivia Oran and Nicola Leske in New York, Nichola Groom in Los Angeles and Deepa Seetharaman in Detroit; editing by Patricia Kranz and Edward Tobin)
DAVOS, Switzerland - Central banks have done their best to rescue the world economy by printing money and politicians must now act fast to enact structural reforms and pro-investment policies to boost growth, central bankers said on Saturday.