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Monday, 14 May, 2001, 21:36 GMT 22:36 UK
Companies hold key to US revival
By BBC News Online's North America Business Reporter, David Schepp

Two groups are pitted against each other in the battle to see who will revive the US economy.

On one side are consumers, with cheque books and credit cards in hand ready to spend, spend, spend if presented with a good deal.

On the other side stands American business, with its wallets screwed tight and its newfound frugality, pulling back the reins of its free-spending ways in the face of higher interest rates.

But are free-spending consumers enough to keep the giant US economy from faltering?

While both consumers and business hold huge sway in the economy, it is business that is largely credited with bringing the boom years of the '90s, spending huge amounts on items from new offices and warehouses to new computers and other equipment.

Recession or revival?

Such spending is referred to in the business world as capital expenditures.

And as much as it fuelled the high-flying '90s, it is now being blamed for the slowdown that has had economists muttering recession for months.

Analysts believe that the record investment made by business in recent years is as much a part of history as the run-up in stock prices in the late 1990s.

In other words, Americans will not soon see record levels of capital expenditures anytime soon just as they will not see record gains on equity investments, such as stocks.

"We need a little more time to build business confidence, which is clearly the problem," says David Blitzer, chief economist for Standard & Poor's in New York.

"What it takes is a conviction that the bottom [of the economy] is not falling out at all, in a sense that the risks of not doing something get to be bigger than doing something."

While Mr Blitzer's outlook is cautious, he generally believes that business confidence will build throughout the year.

Part of what is keeping business on the sidelines are shorter lead times in capital investments.

Companies no longer have to plan years in advance in order to expand production, for example.

"It has been a theme of Federal Reserve chairman Alan Greenspan in a lot of recent appearances over the last several years," says Pierre Ellis, chief economist at Primark Decision Economics.

"Companies can decide not to invest abruptly without worrying about being able to get equipment quickly should conditions change," he says.

The downside to that, Mr Ellis says, is that it leads to much more volatility than the US has seen in the past.

Energy-led boom?

Analysts for months have been pointing to the vast overcapacity in US manufacturing.

Business from stalwart General Motors to new-economy Amazon.com are mothballing plants or warehouses in an effort to cut costs.

Where the capacity is scarce these days is within the energy sector.

Whether the US is enduring an energy "crisis" remains a debate among policy makers in Washington.

What is known is that the nation's ability to produce the energy it needs is substantially less than what it should be, especially given circumstances in California where blackouts are expected to be fairly regular as summer's heat sets in.

But are capital investments in energy-producing gear enough to lift the US out of economic doldrums?

"The spark [could] come from various different places. And one spot that people expect it come from is energy," says S&P's David Blitzer.

"A year and a half ago to tell you that a hot new industry was producing large-scale gas turbines, a technology that was probably considered mature when the first 747 flew in the 1970s, people would have told you I was crazy," he says.

But that is all changing now given the demands for more sources of energy, Mr Blitzer says, adding that it is "stuff we know how to build," such as oil refineries and generating plants.

"One does look at that as a start, and it does ripple through [the economy]."

But other analysts think the energy industry is too insular to provide wide-ranging effects for the overall economy.

"It is probably not going to be the sort of thing that brings the economy back quickly," says Primark's Pierre Ellis.

"It will be a contribution. But it is not the sort of thing that will come online quickly."

So, what will bring the lumbering US economy back to life? Analysts concede it will involve breathing confidence back into corporate boardrooms, where executives are remain wary of antagonising shareholders.

But what is clear is that recovery cannot occur without business loosening its grip on its purse strings.

When will that happen?

"It's the $64,000 question," Mr Blitzer says. "Right now they're all scared."


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