Corporate USA wary of spending as crisis bites

By Nick Carey - Analysis

CHICAGO (Reuters) - Even before mayhem consumed Wall Street last week, many U.S. companies had been forced to reduce spending, pigeonhole projects or cut jobs and there is little to suggest that will improve before late 2009.

"It looks like we're in for an extended period of retrenchment, with declining spending from both consumers and businesses," said Frank Badillo, senior economist at retail consultant TNS Retail Forward. "Recent events may accelerate cutbacks and job cuts in the coming months."

Caught between the credit crunch that has made loans harder to get and more expensive on one hand, plus a weakening economy on the other, much of Corporate America is expected to spend frugally in the coming quarters even though many companies have built a hefty cushion of cash to see them through lean times.

"The good news is that many U.S. companies came into this crisis sitting on a huge pile of cash," said Nariman Behravesh, chief economist at Global Insight. "And a lot of U.S. firms are doing OK -- not great, but OK."

Behravesh said companies with exposure to international markets would continue to see solid earnings, while those exposed primarily to the U.S. economy -- and in particular the struggling housing, automobile or finance sectors -- would suffer more.

But across the board, credit is certainly getting tighter.

According to a quarterly U.S. Federal Reserve survey of senior loan officers in July, 58 percent of respondents said they had tightened lending standards to large and medium-sized businesses, up from 55 percent in April. And more than 80 percent of respondents said their customers were paying more for loans, up from just under 75 percent in April.

That has already lead many companies to cut back.

This week alone power producer Mirant Corp (MIR.N) halted its share buyback program, while casino owner and operator Pinnacle Entertainment Inc (PNK.N) ended its bid to run a $620 million casino resort in Kansas. Both cited financial market "turmoil" for their decisions.

U.S. Bureau of Economic Analysis data for the second quarter show gross private domestic investment fell below $2 trillion for the first time since the fourth quarter of 2004.

And according to the U.S. Bureau of Labor Statistics, in August employers made nearly 1,800 mass layoffs -- involving at least 50 people with one employer -- the highest number since the bureau began tracking mass layoffs in 1995.

THE BIG CHILL

In some areas of the U.S. economy, such as residential construction or the retail sector, the effects of the housing meltdown, slowing economy and credit crunch have been felt since the crunch began in August 2007. But it is apparently creeping into other sectors, such as non-residential construction.

"Recently people have been reporting to us that they are experiencing more of a chill in the credit markets than before," said Kenneth Simonson, chief economist for the Associated General Contractors of America.

That has lead to a number of canceled construction projects and Simonson said more would follow if current credit conditions persist. Other companies are scaling back on investments in areas like information technology.