Friday, April 13, 2007

Capital Spending -- Not Housing -- Biggest Threat

At least according to a survey of economists:

A new WSJ.com survey found that 20 of 54 economic forecasters responding to a query cited soft capital spending as the chief risk to their forecast that the U.S. economy will grow slowly but avoid recession this year.

Only 11 of the economists cited housing; the rest cited other threats, including inflation and oil prices.

Capital spending "scares me more than anything else because I can't explain the weakness," said Stephen Stanley of RBS Greenwich Capital.

The Federal Reserve has similar worries. "The magnitude of the slowdown [in capital spending] has been somewhat greater than would be expected given the normal evolution of the business cycle," Fed Chairman Ben Bernanke told Congress late last month. And the International Monetary Fund, cataloging the risks to the U.S. economy this week, noted "concerns that the current softness of business investment could be extended."

The softness extends across industries. Semiconductor maker Advanced Micro Devices Inc. said this week that it is reducing planned 2007 capital spending by $500 million to about $2 billion amid sharply lower first-quarter revenue and difficulty in taking market share from rival Intel Corp. That spending would, however, still be up from last year's $1.86 billion.


This is potentially a big issue because a slowdown in capital spending was the reason for the last recession. The general theory as to why this is happening is simple: profits are still positive, but they are falling. Companies are tightening their belt to keep profits up for one or two more quarters.

The problem is if a bunch of companies do this at the same time, we're in trouble -- big trouble. I'm not sure the economy could handle a capital spending slowdown and a housing slowdown.