Business spending on new plants and equipment, which led the rebound from the recent recession, has slowed significantly amid fears Congress will be unable to avoid a year-end fiscal disaster.
US business spending fell last quarter for the first time in more than a year, an indicator that businesses are increasingly worried about the future and a harbinger of additional pullbacks in investment and hiring should the outlook continue to darken. On Monday, the survey of business confidence by the Associated Industries of Massachusetts found local businesses’ outlook on the national economy last month plunged to the same levels as during the recession.
“They are very concerned we will continue to have deadlock in Washington and there will be no agreement about the fiscal cliff, taxes, government spending,and so on,” said Andre Mayer, senior vice president of research at AIM, the state’s largest business group. “This is showing displeasure with both sides, the feeling that these people in Washington just can’t get it together and come to grips with very pressing economic issues.”
The decline in business confidence and spending illustrates the stakes involved as the newly reelected President Obama and a still-divided Congress try to compromise on measures to reduce the deficit and boost the economy. It also has significant implications for Massachusetts, which has a high concentration of firms that sell goods and services to other companies and depends more heavily on business spending than the nation as whole.
US business spending, which was growing at 19 percent annual rate a year ago, is now shrinking at a 1.3 percent rate, according to the most recent data. Meanwhile, the Massachusetts unemployment rate has risen a half percentage point since July, to 6.5 percent.
‘People are just sort of sitting on their hands, and that has implications for the economy.’
Vincent Spinali, who runs a family manufacturing business, Prattville Machine & Tool Co., in Peabody, is postponing buying equipment and hiring workers. Congress’s failure to reach a budget agreement, he said, has made it impossible for him to know how much he would pay in taxes next year and whether he will still have defense industry customers if spending is slashed.
“There are a lot of unknowns,” Spinali said. “We’re not in a position to hire, and that has a lot to do with the political mess we have right now.”
Unless Congress acts before January, Bush-era tax cuts will expire, taking some $500 billion from the pockets of consumers and businesses next year. Automatic budget cuts, part of the political deal to avoid default on US debt last year, would also go into effect, sucking another $400 billion from the economy in 2013.
These changes, dubbed the “fiscal cliff” by Federal Reserve chairman Ben Bernanke, are so severe that they could hurt an already fragile economy and lead to another recession, analysts say. The National Manufacturers Association, a lobbying group, has estimated the combination of tax increases and budget cuts could mean the loss of 6 million jobs and drive unemployment higher than 11 percent by 2014.
Many economists predict Congress will reach a compromise. But until that occurs, manufacturers, high-tech companies, venture capitalists, and other businesses are taking a wait-and-see approach. The Federal Reserve Bank of San Francisco estimates that uncertainty has added 1 percentage point to the nation’s unemployment rate, which was 7.9 percent in October.
Raymond G. Torto, global chief economist at CB Richard Ellis Group Inc., in Boston, said he is hearing from commercial property brokers that it is taking longer “to get a deal done,” because they can’t get financing commitments, whether it is leasing, buying, or selling a building, because of political uncertainties. He said he sees an across-the-board slowdown in business investment, whether it is in real estate or new technology.
“Anything that can be postponed will get postponed,” Torto said. “People are just sort of sitting on their hands, and that has implications for the economy.”
Nariman Behravesh, chief economist at IHS Global Insight, a Lexington forecasting firm, said Washington will not “let us go off the cliff,” but he expects that a resolution will take time. He said the lame-duck Congress will probably let some tax exemptions expire and extend others, leaving the hardest decisions for the next Congress, which begins in January. Business spending, he added, would probably remain depressed before rebounding in about a year.
“It will take a while,” Behravesh said. “There’s no question that most people and businesses are just completely horrified by the lack of political leadership and the constant bickering that has been going on. It’s really abysmal.”
Jack Derby of Derby Management, a Boston consulting group, estimated that more than half of his 400 clients are postponing major investments and putting off hiring because of political uncertainties.
“The amount of dollars on the balance sheets of corporate America is at unprecedented levels,” Derby said. “But they’re sitting on it because they’re unsure about their expenses.”
Spinali, the Peabody machine shop owner, said he has spent about $4 million in the last three years buying automated state-of-the-art manufacturing equipment to produce components for semiconductors, medical devices, and defense-related products. He said he was already concerned that the global economic slowdown would hurt demand for semiconductors and his company’s components.
Now he also has to worry about conditions at home, and when his own government will make the spending and tax decisions that could affect him and his company’s 85 employees.
“Congress is so polarized,” he said. “And it seems like we’re a casualty of this war going on between the two parties.”