U.S. economic woes seen leading cos to rethink capex

By Nick Carey - Analysis

CHICAGO (Reuters) - As the specter of recession in the United States looms because of the deteriorating housing market, weak retail sales and other economic worries, many U.S. companies are expected to scale back capital expenditures.

"It's almost a perfect storm," said Peter Morici, a professor at the University of Maryland School of Business. referring to the combination of high oil prices, the credit crunch and the high U.S. trade deficit. "Until now we've been able to avoid it, but now it looks like the private sector will scale back, and we're going to end up in a recession."

There is already evidence that U.S. manufacturers are easing their spending.

The Institute for Supply Management's manufacturing index, which had slipped considerably in the second half of 2007, plunged to 47.7 in December, its weakest since April 2003. A reading below 50 indicates contraction. New orders also fell sharply, which is a sign of softening demand.

"The survey indicates that a significant inventory correction is underway in the factory sector, as demand for capital goods has weakened and uncertainty surrounding consumer demand remains high," Peter Kretzmer, senior economist at Bank of America, wrote in a research note after the data was released on Wednesday.

Data distributed on Friday by the U.S. Labor Department showed that the United States added 18,000 jobs in December and the unemployment rate hit a two-year high, rising to 5 percent from 4.7 percent in November -- the largest monthly rise since October 2001 after the September 11 terror attacks.

"There's a general cautious attitude that is reflected in hiring and in capital spending," said Carl Camden, chief executive of Kelly Services, a global staffing services provider.

Major automakers reported lower U.S. sales for December, closing out its weakest year in over a decade and facing the prospect of deeper declines this year. Ford Motor Co's declines in 2007 cost the company its No. 2 position in the U.S. market to Japanese automaker Toyota Motor Corp.

HAPPY NEW YEAR?

With fourth-quarter earnings season looming, most U.S. companies are reluctant to discuss capital expenditures for 2008 and how their plans may be affected by the state of the U.S. economy.

A sign of things to come may have been evident in December when FedEx Corp, when announcing its fiscal second quarter 2008 earnings, said it had cut planned fiscal 2008 spending to $3.1 billion from $3.5 billion.

Pointing to fuel prices and continued weak U.S. growth, FedEx said that additional reductions were possible as management continued to review the timing of capital outlays.

And Arctic Cat Inc, maker of all-terrain vehicles and snowmobiles, which are considered luxury items, said on Friday it planned to cut production by about 10 percent for the current quarter reflecting weaker demand.

Oil, which broke through $100 a barrel this week, is seen as a major unknown because of the thirst developing countries such as China have for it, which could keep prices high.

Greg Swienton, chief executive of truck leasing company Ryder System Inc, noted that when oil prices rise rapidly they have a "big impact on our customers."