Companies have not scaled back plans for capital outlays yet, but they have indicated that large expansion projects will be closely scrutinized. Indications are that if the financial markets continue to deteriorate and consumer confidence falls farther, then investments in equipment and new facilities may be lowered from what is currently being projected.
Recently, capital spending at the manufacturing level has been robust and is expected to remain fairly healthy, provided that the economy does not edge closer to a recession.
In terms of the types of capital expenditures for next year, productivity improvements and energy-efficiency projects account for the majority of planned projects. These are typically low-investment, high-return projects focusing on energy conservation, incremental capacity gains and reductions in manpower. Total project costs usually do not exceed $1 million and involve the replacement of electric drives, pumps and automation. Several projects ranging from $50 million to more than $200 million are expected to move forward, including a new cheese-processing facility in Colorado, a poultry-processing plant in Alabama, and the expansion of a beverage facility in Indiana.
One of the biggest threats to capital expenditures, particularly those that are larger than $20 million, may be the difficulty in obtaining favorable financing terms if credit markets do not loosen up. In contrast, the credit crunch has left many companies with assets that are undervalued. Those companies may be prime targets for acquisitions as a low-cost alternative for growth compared to growth through building new capacity.