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.

Coca-Cola ko CEO Muhtar Kent said in July that he wants to cut expenses by up to $500 million by the end of 2011. Coca-Cola released third-quarter earnings Wednesday that were better than expected, but the cost of producing drinks rose 4.7%.

Soft drinks might be an inexpensive habit, but PepsiCo pep said the credit crunch, housing slump, job losses and higher gasoline costs have fewer people eating out and driving to convenience stores. To help save $1.2 billion over three years, PepsiCo said Tuesday it would cut 3,300 jobs, or 1.8% of its workforce.

Domino's Pizza dpz CEO David Brandon said the company may raise cash to lend short term to franchisees. Brandon said he did not want to be in the financing business but won't let the company's best franchisees fail.

In the auto industry in recent days, Ford Motor f says it would cut 500 more jobs in Australia, bringing total cuts to 1,500. Nissan Motor says it will cut 1,680 jobs in Spain. And General Motors gm says it will slash production by 40,000 vehicles across Europe.

Some companies will use the downturn to beef up their businesses. Cisco Systems CEO John Chambers said this week that the networking-gear giant will boost spending on information technology by 10% this year.

In Honolulu, a tourism slump and higher shipping costs are hurting William Donohoe, owner of The Shipping Shack package-delivery store. Sales from walk-in customers have fallen 45% since last October. Donohoe is cutting costs everywhere, including saving thousands on monthly energy bills by driving an electric car and using ceiling fans instead of an air conditioner.

If financing flowed more freely, Donohoe would launch a new store in world-famous Waikiki Beach. Instead, he plans to open a new Shipping Shack elsewhere in a partnership with friends.

Seeking new markets, Donohoe is shipping more U.S. Navy goods, motorcycles from dealerships and household furnishings. If the downturn deepens, his business strategies will save him, he says. "It's survival — I'm trying everything I possibly I can," Donohoe says. "I'm not waiting for the government to help me out."