Some businesses put off investment, cut expenses

In Louisiana's post-Hurricane Katrina economy, the Factory Service Agency, a thriving commercial air-conditioning contractor, was enjoying double-digit sales growth on a steady flow of construction projects.

Then the mortgage and financial crisis struck, flattening this year's spending plans for the Metairie, La.-based company and leaving the firm in limbo, says owner Michael Mitternight.

Developers are delaying projects. Costs are rising for truck fuel, steel pipes, refrigerant, insurance. Mitternight's cash-strapped customers are taking twice as long to pay. His suppliers are demanding quick 30-day payments for air-conditioning equipment that he must buy before getting reimbursed by project contractors.

Mitternight hopes to retire and sell his business to his son, but not now. He says the Treasury Department's new rescue plan — to buy $250 billion of bank stock and free up financing for companies and consumers — won't trickle down to him.

"All the uncertainty has reduced our desire to grow right now," Mitternight says. "Everything's been put on hold."

The government's latest bailout may restore some confidence and ease high credit costs, but it will take a long time to reach millions of U.S. businesses. Given the chilly economy, some business owners and analysts doubt that lending will improve enough to encourage expansion.

"If you can't get financing, you're going to pull your horns in, put off that project for a year and slash your budget," says Kenny Landgraf, founder of Kenjol Capital Management.

Hints of retrenchment

More signs are appearing that U.S. businesses are curbing their spending and holding off on major purchases.

The Commerce Department said recently that new U.S. factory orders in August tumbled 4% — the steepest drop in two years. Capital goods orders, which chart future investments by companies, fell 2% in one of the biggest drops in almost two years.

According to the Institute for Supply Management, U.S. manufacturing shrank in September, falling 6% to 43.5 on the ISM monthly index. That's the lowest since October 2001. In technology, a high-powered engine for U.S. economic growth for decades, researcher Gartner this week cut its 2009 estimate on information technology spending to 2.3% from its earlier estimate of 5.8%. And in a survey to be released soon by the National Association of Manufacturers, more manufacturers say tighter bank lending standards are reducing their ability to expand and make investments, says chief economist David Heuther. "The outlook has been deteriorating over the past few quarters," he says.

Short-term lending rates between banks have eased a bit this week. But Heuther cautions that "the movement hasn't been significant yet, so there's still a lot of unease out there."

Paul Novak, CEO of the Institute for Supply Management, warns that more manufacturers are starting to "pull back on capital expansion."

Some companies are shrinking their pool of suppliers to several hundred from 1,000 or more, he says. If a big corporation curtails $1 billion in monthly spending on suppliers, the impact on the supply chain would be devastating.

"We've got to put liquidity back into the commercial paper market," Novak says, "or we're going to see companies closing their doors."

Reactions ripple through

As large U.S. companies and multinationals see nervous consumers rein in their spending, businesses also are curbing their costs and future investments.

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