Texas Insider Report: WASHINGTON D.C. Wed love to hire more people but were saying no" said John Selldorff chief executive of a global manufacturer of power devices. But for the rest of the year Mr. Selldorff says
his company plans to hold off on doing things that we might otherwise do if the environment were more stable."
The worries come amid broader fears that the economy is losing momentum the annual rate of economic growth in the second quarter fell to 1.5 from 2 in the first quarter and 4.1 in the last quarter of 2011.
Until recently the loudest warnings about the economy have come from policy makers and economists along with military industry executives who rely heavily on the Pentagons largess and who would be hurt by the government reductions. But more diversified companies across the economic spectrum have begun to hunker down as well.
A rising number of manufacturers are canceling new investments and putting off new hires because they fear Washington will force hundreds of billions in tax increases and budget cuts in
January undermining economic growth in the coming months.
On Thursday the Commerce Department reported that factory orders unexpectedly fell 0.5 percent in June from the previous month while data on the labor market released Friday showed job creation still falling short of the level needed to bring down the unemployment rate.
All told the political gridlock in the United States along with the continuing debt crisis in Europe will shave about half a percentage point off growth in the second half of the year estimates Vincent Reinhart chief United States economist at Morgan Stanley.
More than 40 of companies surveyed by Morgan Stanley in July cited the fiscal cliff as a major reason for their spending restraint Mr. Reinhart said. He expects that portion to rise when the poll is repeated this month.
Economists generally overstate the effects of uncertainty on spending but in this case it does seem to be significant" he added. Its at the macro- and microeconomic levels."
Executives at companies making everything from electrical components and power systems to automotive parts say the fiscal stalemate is prompting them to pull back now rather than wait for a possible resolution to the deadlock on Capitol Hill.
Democrats and Republicans are far apart on how to extend the Bush-era tax breaks beyond January the same month automatic spending reductions are set to take effect unless there is a deal to trim the deficit. The combination of tax increases and spending cuts is creating an economic threat called the fiscal cliff" by Ben S. Bernanke chairman of the Federal Reserve.
The fiscal cliff is the primary driver of uncertainty" said Timothy Powers the chief of Hubbell Inc. a maker of electrical products. Hubbell a maker of electrical products has canceled several million dollars worth of equipment orders and delayed long-planned factory upgrades in the last
few months said Powers. It has also held off hiring workers for about 100 positions that would otherwise have been filled he said.
The fiscal cliff is the primary driver of uncertainty and a person in my position is going to make a decision to postpone hiring and investments" Mr. Powers said. We can see it in our order patterns and customers are delaying. We dont have to get to the edge of the cliff before the damage is done."
Unless Congress acts to extend the tax provisions and comes up with a budget deal that averts the planned reductions in military spending and other government programs taxes will rise by $399 billion while federal government spending will fall by more than $100 billion according to an analysis by the Congressional Budget Office.
Last week Congressional leaders did manage to agree tentatively to keep the government financed through next March extending a deadline that had been set to expire Oct. 1 but that deal did not address the extension of the tax cuts or spending reductions.
All together the fiscal cliffs total impact equals slightly more than $600 billion or 4 of gross domestic product and if no action is taken the Congressional Budget Office projects the economy will shrink by 1.3 in the first half of 2013 as a result.
With many Fortune 500 companies now setting budgets and planning for 2013 chief executives say they cannot afford to hope for the best. Wall Street is also paying more attention: over the last few weeks chief executives of companies like Honeywell U.P.S. and Eaton all cited the uncertainty as a threat to earnings in the second half of 2012.
Were in economic purgatory" said Alexander M. Cutler the chief executive of Eaton a big Ohio maker of industrial equipment like drive trains and electrical and hydraulic systems. In the nondefense nongovernment sectors thats where the caution is creeping in. Were seeing it when we talk to dealers distributors and users."
As a consequence Mr. Cutler lowered Eatons projected results for 2012 in late July adding that he sees particular weakness in the heavy-duty truck market. I dont think theres any question the
economy is starting to see an impact from the fiscal cliff" Mr. Cutler said. He noted that as companies retreat the effect is multiplied by the impact it has on other sectors like restaurants and hotels.
Siemens the German industrial giant remains optimistic over the long haul about the American market but has turned more cautious in the short-term said the companys chief financial officer Joe Kaeser. Siemens has slowed the filling of openings among its 60000 member work force in the United States while delaying some new investments and capital expenditures. We would expect volatility till after the election and the fiscal cliff is sorted out" he said.
Many in Washington predict a solution that keeps most of the tax cuts in place and avoids the worst of the budget cuts in the short-term will emerge after the November election but John Selldorff is not taking chances as chief executive of the American subsidiary of Legrand a global manufacturer of power devices based in France.
Smaller companies that serve both military and civilian customers are also taking steps. Ace Clearwater an aerospace firm in Torrance Calif. began the year projecting a 7 percent rise in revenue but now expects sales to be flat at best down 10 said Kellie Johnson the companys owner.
As a result Ms. Johnson said the company had decided not to fill eight open positions among its 200 member work force canceled a half-million-dollar machine order and opted to buy a used forklift instead of a new one saving more than $100000.
Everyone is sitting back and hunkering down" she said.
