Business Investment Growing More Cautious

Some firms will take advantage of new incentives from Uncle Sam to spend, but they'll be in the minority.

By Jerome Idaszak, Associate Editor, The Kiplinger Letter

April 22, 2008

Business spending will chalk up gains of only 2.5% or so this year, half of last year's rate. Throwing up the caution flag are higher lending fees and stricter lending standards, sluggish growth in corporate profits and rising doubts about a second-half economic pickup. The spending slowdown will affect both equipment and brick-and-mortar projects.

Signs of a broad pullback are evident in recent durable goods orders: Two consecutive months of declines and prospects for a third, in March, according to a survey of purchasing managers. In addition, the weakening involves more than just housing and autos. But energy, agriculture, computers and aircraft are seeing increases.

This year's expected slowdown will still be better than in 2001 and 1991, both years when spending by businesses actually contracted.

If not for the stimulus package providing swifter, larger write-offs for businesses that buy new equipment before the end of this year, the slowdown would be even worse -- though only about a third of midsize and small companies expect to benefit from the program of tax breaks.

Among those investing in new equipment is Ryan Robinson, president and co-owner of Signal Metal Industries in Irving, Texas, whose firm will spend $600,000 on a new machine tool and a large forklift instead of making repairs on older equipment. "It will help us compete better with India and China," says Robinson.

Meanwhile, Raymond Pinard, president and CEO of 48HourPrint.com in Boston, will save about $300,000 in taxes on a $2-million investment in new printing presses. Orders are good, he says, and the stimulus spells "an opportunity for us" to get a jump on competitors.

But for many other businesses, tax breaks aren't enough to get them to invest in these uncertain economic times. A survey just released of small and midsize firms by PNC Financial found that two-thirds expect little or no benefit from the stimulus package.

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