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Ominous signs in pullback by businesses

By Steven Syre
Globe Columnist / October 7, 2008
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Companies employ a particular strategy for spending money in the middle of a crisis. They stop.

All around the world, you can hear the squeal of businesses putting the brakes on expenses, a decision that will have serious implications around the world right away and well into next year. That usually means an economic recession lurks around the corner or may have already arrived.

Individuals may tighten their belts when times get tough. Companies lock the safe and just say no to new expenses.

The world's stock markets were whipped around and driven sharply lower yesterday by two related fears. Investors worry the spreading credit crisis freezes out companies, governments, and individuals from loans that would have been considered routine weeks or months ago. But the kind of global recession that seems certain to follow this credit crisis would cause damage of a greater magnitude.

"People have muddled the financing crisis with the global slowdown," says John Forelli of Independence Investors in Boston. "They're related, but they're two issues. The government is trying to fix the funding crisis, but they're not even trying to address the global slowdown" in economic growth.

Business executives think about both of those issues when they make the decision not to buy computers or trucks or machinery. They would rather stack cash than spend it while credit is difficult or impossible to access, just in case. But they also worry about demand for their own products if corporate customers are unable to borrow to buy, another reason to cut back on or stop making new purchases of their own.

Analysts believe many businesses have been cutting back on spending for a while now, a trend that has become more pronounced in recent weeks. This should become clear later this month, when companies report quarterly financial results and describe business prospects for the near future.

"The credit difficulties are having an impact on all kinds of companies," says Ken Taubes, head of US portfolio management at Pioneer Investments in Boston. "Businesses are looking at their budgets for 2009, and I think they're going to take a meat cleaver to them. The slowdown could extend well into the year."

SAP AG, a giant German company that sells complex computer software to businesses around the world, warned shareholders yesterday that orders for its products fell off steeply at the end of September. It said the "market developments" of the past few weeks had a dramatic effect on many of its big corporate clients. "These concerns triggered a very sudden and unexpected drop in business activity at the end of the quarter," the company said.

If a company like SAP, whose products are considered the top of the line for corporate software, is taking a hit, others that serve business clients must be hurting, too. At least that's how investors took the news yesterday, and they were almost certainly right.

Stock indexes laden with companies that sell most of their products, especially high technology wares, to other companies are already struggling and got hit hard again yesterday. The American Stock Exchange's Computer Technology Index, which includes stocks like Microsoft Corp., IBM Corp., and Cisco Systems Inc., has fallen 23 percent in less than two months. It was down nearly 9 percent yesterday, before recovering about half its lost ground late in the afternoon.

Closer to home, EMC Corp. of Hopkinton saw its stock fall to the lowest level since the summer of 2006 yesterday. Shares of the company, which sells computer hardware and software to businesses, have lost nearly a third of their value since mid-August.

Smaller companies all over Massachusetts serve the same kind of corporate clientele. They, too, will have to cope with reluctant customers.

Companies went through another period of reluctant business spending early this decade under different circumstances. The crash of the technology stock market and trauma of the Sept. 11, 2001, terrorist attacks convinced businesses to sit tight on their money.

There was no comparable credit crisis then, but companies warned investors no one could see far enough into the future to predict better times with any confidence. Executives said they lacked "visibility" and decided spending money under those circumstances might be a good way to get fired. Visibility could become a big problem again in 2009.

While businesses held onto their money early in the decade, individual consumers brought the economy back to life. Ironically, the housing boom and its cheap mortgages made that possible. Those consumers are in trouble now and are in no position to lead any kind of a recovery. Consumers who can't spend and businesses that won't are a combination that will make 2009 a long year.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.

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