Firms need to do more for U.S. than sit on cash

The Baltimore Sun

Under Armour, the athletic-apparel company, is plowing millions into its Glen Burnie distribution center, upgrading the computers, expanding the capacity and accelerating the turnaround times.

Unfortunately, there's not enough of this kind of investment going on to replace the flagging housing industry as an economic booster.

Some analysts lauded last week's bullish report on March business investment, saying it portends faster economic growth and possibly a takeoff from a "soft landing" engineered by the Federal Reserve. A closer look suggests otherwise.

Businesses are aiming much of their capital spending overseas, where costs are lower and economies are growing faster.

With the housing slump causing continued uncertainty, analysts said, companies may stay reluctant to bet big on the United States for a while.

"I expect business investment to slowly pick up," says Joel Naroff, president of Naroff Economic Advisors in Holland, Pa. "But are we going to see double digit growth? I just don't see it."

Under Armour declined to discuss its warehouse upgrades, saying through a spokeswoman that it didn't want to risk disclosing material information in advance of this week's profit report (this even though public companies are explicitly allowed to discuss their business with news organizations without violating federal "fair disclosure" rules).

But according to Securities and Exchange Commission documents and investor conference calls, the company is devoting more than $20 million to the kind of investments that helped make the 1990s legendary: software and equipment purchases to increase future productivity and output.

Under Armour is soaring higher than a home run by (Under Armour endorser) Alfonso Soriano, but Wall Street is pressuring the company to increase costs more slowly than revenue. The distribution-center project should both contain expenses and provide the wherewithal for continued expansion.

Under Armour, however, is the exception. When you're growing by 50 percent annually, as is Under Armour, you must invest in the future. When you're growing by less than 2 percent annually, which is what some analysts expect of the U.S. economy this year, the future can wait.

An unscientific look at Maryland business investment, as revealed by regulatory filings and investor conferences, shows spending confined to a few hot sectors rather than being spread evenly.

Perhaps nothing is hotter than energy, whose purveyors are flush with cash from high prices.

Oil refiner Valero Energy just finished tank renovation and a big increase in its storage capacity in Baltimore and St. Mary's County. Sempra Energy is getting ready to build the first Maryland electrical-generation plant of any size in years, near Frederick.

Washington Group International is working on contracts worth millions to install anti-pollution equipment on Maryland power plants. Dominion is expanding its liquefied natural gas terminal on the Chesapeake.

Health care, as previously noted here, is also a growth overachiever.

Of many plans on the board, Johns Hopkins is spending $1 billion to overhaul its inpatient space, and the University of Maryland Medical Center is building a $200 million outpatient building.

Five Star Quality Care rehabbed its senior-living center in Silver Spring.

Telecom is perking up, represented most visibly by Verizon and its subcontractor Dycom, which are building billion-dollar cable networks in Maryland and other states. This is a significant economic boost.

But spending in telecom still isn't close to what it was in the 1990s and early 2000s. And neither is it in the rest of the economy.

Significant manufacturing investment, in Maryland and the nation, is notably missing. So are substantial transportation upgrades.

Momentum missing

Sure, you've got a few hotels and office buildings going up, and banks and other service businesses continue to maintain and upgrade their computer networks. But the momentum there and from the energy and health care sectors is still nothing that will replace the housing boom.

Last week's government durable goods report showed an 8.2 percent increase in business capital goods orders, compared with that of February. That's a huge increase, and optimists hoped it meant companies will start investing more of their enormous profits in production rather than just buying back their stock.

"Profits are still quite high. Financings are readily available. Interest rates are low. Companies are still sitting on a lot of cash," says Haseeb Ahmed, an economist with J.P. Morgan Chase. "All that stuff is there," primed to fuel investment.

Cautious outlook

And yet, Ahmed says, he is only cautiously optimistic about the rest of the year. While he doesn't foresee recession, he thinks the housing slump will hurt growth even as corporate investment fails to sustain March's pace. What sustained investment exists seems to be happening overseas.

The housing boom is dead. But we still don't have an heir apparent for an economic engine.

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