Slide in Capital Spending Signals Anxious Outlook

Heralding leaner economic times ahead, more and more companies in California are cutting jobs, ratcheting down investment in their businesses and taking other belt-tightening measures not seen since the last recession.

The cutbacks, which have accelerated in California and nationwide in the last few months, largely reflect Asia’s growing toll on U.S. corporate profits, the gyrating stock market and widespread expectations of a downturn next year. In the last month alone, major California employers such as Arco, Chevron, Hewlett-Packard, Packard Bell and Boeing have announced reductions in staffing or capital spending--or both.

Capital spending, or expenditures for plants and machinery, has been a driving force in the nation’s long economic expansion, along with exports. But both have faded this year.

The Federal Reserve Board’s unexpected cut in interest rates will help, bolstering confidence, as it did on Wall Street this week. It will also be cheaper for businesses to borrow for expansion. Even so, the Fed’s action isn’t likely to greatly influence corporate decisions on capital purchases, given the uncertain economic outlook.

The Fed’s short-term rate cut, to 5% from 5.25%, “will help mitigate the slowdown in business investments, but it’s not going to have a large direct effect,” said Ross DeVol, an economist at the Milken Institute in Santa Monica.

Most manufacturers don’t need a lot of new equipment and machinery right now because their existing stock isn’t being fully utilized. U.S. factories were running at 79% capacity last month--the lowest since September 1992.

Take Santa Ana-based Express Manufacturing, one of the state’s largest electronics assembly firms.

Until earlier this year, co-owner C.P. Chin said his company had expanded aggressively, adding two buildings, millions of dollars in equipment and 300 workers over the last three years. But now, with competition from Asia increasingly pinching his sales and profit, Chin’s plants are running at just 65% capacity. He says he hasn’t laid off workers, but he’s retreating from further hiring and capital spending.

“We need to get to 85% to 90% capacity, then we’ll start adding new equipment,” he said. When might that be? Like most business owners, he has no idea. His best guess is short-term. “The way it looks now, we think we’ll be more affected by Asia early next year.”

Chin is better off than many in the high-tech sector, particularly in Silicon Valley, where one company after another has been hurt by shrinking demand from Asia and has responded by slashing jobs and other costs.

Hewlett-Packard, the giant computer maker in Palo Alto, began this spring with small, mostly symbolic cuts, such as canceling company picnics. Then, in the summer, middle managers took a 5% pay cut for three months. Two weeks ago, the company moved to trim 2,500 jobs by offering a voluntary separation plan.

Nationwide, electronics and computer firms have led the job cuts, accounting for about one-fourth of the 431,500 positions eliminated between January and September, according to Challenger, Gray & Christmas, a Chicago outplacement firm. That includes 71,000 jobs erased by California companies, although not all the workers are in this state. That is the highest since at least as far back as 1992.

Even so, California thus far has more than weathered the recent flurry of layoffs, as other businesses, mostly in the service and housing industries, have kept on hiring. Overall, statewide job growth has slowed but still averaged 24,000 a month in the third quarter.

Other indicators also point to a California economy that is still healthy. Consumer confidence, while slipping lately, remains fairly high. Through the first half of this year, personal income and retail sales continued to rise ahead of the nation.

Also, companies like supermarket chain Stater Bros. and CKE Restaurants, the operator of Carl’s Jr., are planning significant expansions next year, reflecting California’s robust outlook for population and housing growth.

Jack Brown, chairman of Colton-based Stater, a $2-billion chain with 112 outlets in the Southland, said he is budgeting a 50% boost in business investments next year. “If we don’t acquire any, we’ll build six new stores,” he said.

But companies like Stater are increasingly in the minority. Most businesses, including the service sector, appear to be reducing capital spending, fearing a marked slowdown in the U.S. economy next year, possibly even a recession. For others, the pullback isn’t so much a reaction to Asia or Wall Street but more a pause after a long expansion.

Whatever the case, the overall effect will be substantial.

“It is worrisome,” said Esmael Adibi, an economist at Chapman University in Orange, who estimates that growth in U.S. business investment will amount to no more than 3% this year, after booming at 8% to 10% annually during the preceding four years.

The long-term worry, he said, is that lower investment could reduce productivity. In the short run, cutbacks in capital spending will further erode manufacturing employment, and California figures to take a bigger hit as a bigger producer of capital goods, notably high-tech equipment.

Employment at factories that make durable goods, or products that are likely to last three years or longer, fell by about 6,000 between July and September in California. As of September, the state’s overall manufacturing employment was up 1% from a year earlier--compared with a decline for the nation. But all of that increase was in nondurable manufacturing, largely lower-paying jobs such as apparel and food processing.

David Goodreau, owner of Newman Machine Works in Burbank and chairman of California’s Small Manufacturers’ Assn., worries about the hundreds of small shops that make parts for capital-goods producers.

“Few people are continuing along the path of expansion,” he said. As the backlog of work for aerospace, high-tech, medical and other manufacturers winds down, he predicted, “in the next three to six months you’re going to see a shake-up in the manufacturing base. I think it will start in Northern California and head south.”

But it isn’t just manufacturing that is suffering a retreat of corporate investment.

Like other oil companies battered by low crude prices worldwide, Los Angeles-based Atlantic Richfield Co. this week announced a sweeping restructuring that included 900 layoffs and undisclosed cuts in capital spending.

The announcement followed an executive shake-up at Arco and the jettisoning of the company’s two corporate jets.

Mergers and acquisitions involving retail, banking and other service firms have contributed to shrinking corporate investment for some in those industries.

California’s computer services sector, dominated by small firms, has continued to grow. But cutbacks by large corporations are starting to trickle down to them.

About a month ago, Internal & External Communication, a 160-employee firm that enjoyed a meteoric rise in its sales of computer-based training products, got a shock from two major longtime customers. Citicorp, which had merged with Travelers Group and was hurting from the turmoil in global financial markets, suddenly put a hold on IEC’s work. FDX Corp., the former Federal Express, did the same.

At about the same time, IEC’s founder and president, Alexandra Rand, was in talks to provide services to American Stores Co., owner of the Lucky grocery and Sav-On drugstore chains. But after its merger with Albertson’s Inc., announced in August, that also stalled.

“We’re hopeful that these will be the only specific instances of projects being put on hold,” Rand said. “We’re certainly seeing a general hesitation on ’99 corporate budgeting.”

Ely Callaway, founder and chairman of Carlsbad-based Callaway Golf, shows no hesitation when asked about his plans. “There’s going to be some shrinkage,” he said.

Callaway’s sales of its popular Big Bertha clubs have been dramatically affected by slack demand from Asian customers. On Thursday, the 79-year-old Callaway reassumed the role of chief executive in an abrupt shake-up that resulted in Donald Dye’s resignation from that job.

In an interview Friday, Callaway said final decisions on next year’s plans will be unveiled within two weeks. But he added that there would be layoffs and cuts in capital investment as well as every other area, with the exception of research and development.

One capital-intensive project did survive management’s scrutiny, he said. The company will continue to build a 200,000-square-foot plant in Carlsbad to produce golf balls by 2000. Beyond that, he said, “our policy for now is to get more serious than ever about general cost-cutting.”