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Us plants and wallets { February 25 2003 } Original Source Link: (May no longer be active)
http://www.washingtonpost.com/wp-dyn/articles/A62389-2003Feb24.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A62389-2003Feb24.html
In U.S. Plants and Wallets, The Other Iraq Standoff
By Alec Klein
Washington Post Staff Writer
Tuesday, February 25, 2003; Page A01
It is the afternoon shift, and the factory floor should be shaking to the rhythm of hulking steel machines that tear metal apart. And yet, all that Arthur "Don" Wainwright can hear is the deafening roar of silence.
"There's nothing running out on the plant today. It's almost eerily quiet out there," the chairman and chief executive of Wainwright Industries Inc. said one recent workday.
The St. Peters, Mo., manufacturer of parts for planes, cars and trucks is operating at about 70 percent capacity, and things have gotten worse lately. Battered by competition overseas and a tough economy at home, Wainwright is now feeling the effects of another elusive threat: war in Iraq. Customers, leery of spending millions on big-ticket items with so much uncertainty in the air, have been slow to place new orders. Official hostilities haven't begun, but the prospect of military action is already damaging the U.S. economy.
Federal Reserve Chairman Alan Greenspan recently warned that concerns about a looming war are prompting a slowdown in corporate spending just as the nation tries to pull out of a prolonged slump. Companies are retreating across the landscape. Manufacturers, many of which have been struggling for years, are now even more unwilling to purchase expensive capital goods. Hotel owners are putting off hikes in room rates, some retail chains are unwilling to make expansion plans beyond a few months, oil operators are holding off on drilling new wells, and automakers are scaling back production and advertising.
"Nobody in their right mind would buy a factory or buy a car if someone is going to drop anthrax on your head," said John Rutledge, chairman of Rutledge Research, an advisory firm in Greenwich, Conn. What is happening, he said, is tantamount to U.S. companies stashing away money in the mattress, awaiting the end of a war that hasn't happened. "Monetary policy is essentially being run by Saddam Hussein," Rutledge said.
In the Fed's latest economic survey, it found anecdotal evidence from Boston, Dallas and Atlanta that war jitters were taking a toll . Economists, gathering the latest figures, say it may be too early to assess the damage. And many businesses, to be sure, aren't panicking. Wal-Mart Stores Inc., for example, said it's on course to spend as planned, and why not? Customers, alerted to the potential of a terrorist attack, have been leaving the retailer's shelves barren of such necessities as duct tape and plastic sheeting.
But in many other cases, businesses are holding back on spending, leaning on the lessons of the first Persian Gulf War. After Allied forces started bombing Baghdad in January 1991, consumer confidence spiked and the markets immediately soared, with the Standard & Poor's 500-stock index jumping 20 percent in the first three months. Corporate interests are hoping for a replay, a brief and decisive victory -- and a resumption of business as usual.
"If there is going to be a war, the hope in our industry is that it would not last long and this era of uncertainty would be done away with," said Joseph M. McGuire, president of the Association of Home Appliance Manufacturers.
Economists, however, are mindful that a short war could also lead to short-lived euphoria, another effect of Operation Desert Storm. When the smoke cleared, U.S. companies were left to grapple with the hangover from those times, including a weak economy recovering from the savings-and-loan debacle. It took two more years before the economy developed a full head of steam.
"The Gulf War triggered a relief trade in equity markets and a brief surge in consumer business confidence, but in the final analysis, we didn't have a normal, self-sustaining recovery until '93," said David Rosenberg, chief North American economist at Merrill Lynch & Co. in New York.
A Catch-22
Tony Raimondo doesn't need to be reminded. Things were rough in the early '90s for his company, Behlen Mfg. Co., a maker of livestock and horse-stall equipment and steel buildings. "The last time this happened, in 1991 with Desert Storm, people got in a wait-and-hold and were not doing the kind of capital spending that keeps our business going," he said.
Raimondo, chairman and chief executive of the Columbus, Neb., company, thought he had survived the worst of the manufacturing recession over the past two years. He laid off about 20 percent of his workforce, which now stands at about 1,250 employees at plants in Nebraska, Alabama, Indiana, Oregon and Tennessee. But Behlen hit a wall in the past few months. Sales have fallen about 12 percent from the same period of last year. Customers, he said, are not in the mood to buy the kind of big-ticket items, such as airplane hangars, that his company makes.
"They sure as hell don't want to buy a building if there's a war," Raimondo said.
As a temporary measure, Behlen has cut wages by 10 percent in February and March for its 250 office workers. If things don't improve, Raimondo said he might have to trim the workforce again. As it is, the manufacturer is holding the line on costs. Just as its own customers are delaying big purchases, so is Behlen. Raimondo is holding off on buying new capital equipment to replace older models on the factory floor. But he calls it a Catch-22. The more he tries to conserve in cash, the more he loses in productivity. Older machines can't produce as fast or efficiently as newer equipment. Productivity, as a result, has dropped to $120,000 in shipped orders per worker, down from $135,000 last summer, he said. All the while, his goal of $150,000 per person continues to recede.
"The free-market system, while the best in the world, is a cruel system," Raimondo said. "What we're all looking for is a reasonably quick resolution [to the Iraqi standoff] and confidence being gained in economic conditions."
Oil interests are holding their breath, too. After U.S.-led forces expelled Iraq from neighboring Kuwait more than a decade ago, oil prices fell, in part because the liberated Arab state recovered faster than expected and resumed oil production. Which is why the phone isn't ringing off the hook in the office of Jay Reynolds, president of Rod Ric Drilling, a private company in Midland, Tex.
Gas prices are already high, and independent operators are reluctant to begin costly drilling projects for fear that another quick war could lead to a glut of oil on the market and depress prices. Instead of talking with customers about drilling contracts that run from $100,000 to $150,000, Reynolds said the conversation invariably wanders to the issue of war, whether it will happen, whether it should happen and how long it might last.
"This war worry is hanging over their heads, and the sense I get is, if there is a war, following the war, it will remove the uncertainty," Reynolds said.
Until then, the complex chain from oil exploration to selling gas at the pump is stalling where Reynolds does business, in Louisiana, New Mexico and Texas. Independent operators are holding up on researching new fields, which means drillers aren't being hired as much, which means refineries are doing less business.
Slow Going for Automakers
Uncertainty is also taking hold of automakers. A short war is expected to result in about 200,000 in lost U.S. car sales, bringing its annual total to 16.3 million, down from 16.7 million last year. So automakers are cutting their own spending. Nissan Motor Co., for one, is looking at scaling back its advertising, and company officials said they have already been in contact with television networks to reschedule air time in the event of a shooting match overseas.
Nissan has also been cutting production of its popular Altima model at its big plant in Smyrna, Tenn. Despite customer incentives, such as cash back and discounted financing, the Altima isn't a cure for war fears. Sales began to ebb in recent months, and the trend was immediately apparent in the numbers blipping daily on corporate computer screens. Taking quick action, the automaker eliminated the plant's two-Saturday-a-month shifts and overtime, turning nine-hour shifts into regular eight-hour days. The company projects the plant will make 225,000 to 230,000 Altimas this year, on a par with last year's total, but it hopes a short war and a rebound later in the year will allow the factory to restore overtime and reach its capacity of 250,000.
"The economy was already difficult, no question about that, but the possibility of conflict, the uncertainty, makes people refrain from doing things they don't have to do," said Jed Connelly, senior vice president of sales and marketing for Nissan North America.
These are supposed to be good times for auto dealers, especially in the Northeast, as the weather thaws and the coming spring presages a strong selling season. But try telling that to Jimmy Gordon, vice president of Herb Gordon Auto Group, a Nissan partner and dealership in Silver Spring. Sales in the past 90 days are down about 15 percent from the same time last year.
"We're stuck in neutral," Gordon said. "People aren't real excited about spending and making a commitment for future payments because there's so much uncertainty."
The Commerce Department said retail sales in January fell nearly 1 percent, led by a drop in auto sales. Gordon's dealership is beginning to feel as gun-shy as its customers about making big purchases; it is considering curtailing its own spending habits, looking at advertising expenses, overtime costs and staffing levels.
The retrenchment is in evidence in several other sectors. With weakness in the financial markets, business travel was already down. Now, combined with the drumbeat of war, Hilton Hotels Corp. said it is having difficulty raising room rates. Marc A. Grossman, Hilton's senior vice president of corporate affairs, calls it "the double whammy of the economy and war jitters." Hilton expects to open about 100 to 115 hotels this year, most independently owned and operated. That's down from 142 last year, and many of them are lower-end hotels under its umbrella, such as the Hampton Inn.
At Textron Inc., a maker of airplanes, helicopters and industrial components, officials said tough global economic conditions are expected to reduce the sales of its Cessna business jets from 250 to 220 this year. Executives of Jos. A. Bank, a Hampstead, Md., men's retailer, said they are sticking to plans to add 50 stores to the chain's 160, but they're keeping options open by signing leases only three to four months in advance. "It always gives us that flexibility if something catastrophic were to happen," said David E. Ullman, the company's chief financial officer.
United Airlines is developing contingency plans, too, but won't disclose them. Caterpillar Inc., the big construction and equipment manufacturer, isn't talking, either, but recently warned of a difficult year, citing "the geopolitical tensions in the Middle East" and "prolonged weakness in capital spending." And Hewlett-Packard Co., the giant computer maker, is mum but also bracing for the effects on technology spending in light of the "atmosphere of uncertainty."
This much is certain: A drop in corporate spending concerns financial analysts, such as Ethan Harris, chief U.S economist at Lehman Brothers in New York. He points out the United States is still recovering from a rash of corporate scandals and the continued specter of terrorism. The prospect of war could tip the fragile economy into further trouble, he said. Already, the unemployed are finding it harder to find jobs. About 20 percent of the unemployed remain jobless for more than half a year, up from 14 percent a year ago, he said.
But what concerns Harris even more is what could happen in the event of a war that does not go according to Pentagon plans. "That's the environment where one major shock to the system is enough to cause a recession," he said. "A bad war could do it."
© 2003 The Washington Post Company
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