- Nick TimiraosThe Wall Street JournalCANCEL
Updated March 22, 2015 5:52 p.m. ET
Prospects for an uptick in business investment this year are facing a major drag: The collapse in oil prices is spurring significant cutbacks for the energy-production industry, which had been a standout in an otherwise lackluster U.S. expansion.
Business capital spending increased 6% last year due to gains from a broad base of U.S. industries. The drag from energy this year could cut that growth rate in half in 2015, according to economists at Goldman Sachs.
Moreover, equity analysts at the bank estimate capital spending globally by energy companies in the S&P 500 will fall 25%, leading to the first annual decline in overall capital investment by big firms in many sectors since 2009. Already, energy companies in the S&P 500 have announced about $8.3 billion in spending cuts.
The energy cutbacks come when exporters and manufacturers more broadly face headwinds from a strengthening dollar, which makes U.S. goods more costly abroad.
The U.S. economy still comes out a big winner with cheaper oil. Consumers who spend less on gas generally spend more at retailers and restaurants. Companies also benefit from lower materials costs.
But big capital-investment cuts in energy production underscore how the economy has been transformed by a domestic energy boom that reached deep into the industrial economy during the current expansion.
For steel producers, “it’s a very clear case of short-term pain and, we hope, long-term gain,” said Bill Hutton, president of Titan Steel Corp. in Baltimore.
Energy has been as big a domestic consumer of steel as the automotive industry in recent years and helped compensate for a still-ailing construction sector, said Mr. Hutton. The hope now is that consumers will pick up the slack as they spend more on cars, refrigerators and washing machines.
Between 2009 and 2014, investment in structures and equipment for oil- and gas-field exploration accounted for 70% of net industrial investment in the U.S., according to Jason Thomas, director of research at Carlyle Group. That represented an estimated $245 billion in investment last year, or 11% of total nonresidential investment.
Still, such investment accounts for a relatively small slice of the U.S. economy, or less than 2% of gross domestic product.
Economists at J.P. Morgan expect energy capital spending cutbacks to subtract 0.3 percentage point from GDP growth this year. The boost from cheaper oil to consumer spending, which accounts for two-thirds of GDP, should add one percentage point, according to the J.P. Morgan forecast.
Other industries eventually could compensate for the energy cutbacks.
Excluding energy, capital spending growth of 4% for S&P 500 companies this year will be down from a 5% forecast last fall, said Tobias Levkovich, chief U.S. equity strategist at Citi. That would mark the sixth straight annual gain in business investment for the sectors excluding energy and finance.
The problem is it could take time for airlines, trucking firms and agribusiness to turn energy savings into new investment. The rising dollar also is crimping multinationals’ profits, which could curb investment spending right now.
“The transportation sector will be very pleased about their windfalls,” said Ed Yardeni, president of Yardeni Research Inc., an investment-strategy consultancy in Brookville, N.Y. “But they’re not going to respond as quickly to order new trucks and jets as the oil companies have responded by cutting back.”
Philip Verleger, an energy economist in Carbondale, Colo, said “On one hand, we’re talking about an ant. On the other, we’re talking about an elephant,” said Philip Verleger, an energy economist in Carbondale, Colo.
That is cold comfort, of course, to energy companies being forced to conserve cash while losing access to cheap financing as oil prices have plunged. Executives have announced budget cuts on earnings calls during the past two months.
“It is bare bones, but we can get barer,” John Rynd, chief executive of Hercules Offshore Inc., told investors last month. “This is not a time where you paint things or you buy new things.”
Clayton Williams, chief executive of Clayton Williams Energy Inc., told investors that a recent round of cuts was “similar to Dunkirk,” referring to the evacuation of Allied soldiers from French beaches in World War II. “We’re doing what it takes to survive.”
Investors also are looking for clues of energy losses rippling beyond the factory floor. One area of attention is finance. The energy sector accounts for about 17% of high-yield debt outstanding, or $178 billion, making it the largest single sector, according to Goldman Sachs. Just three years ago, it accounted for 5.9% of such debt.
The housing market in energy-industry regions represents another pressure point. Houston issued 38,300 single-family building permits last year, just 300 fewer than the state of California.
For now, the city is “holding up just fine,” said Richard Campo, chief executive of Camden Property Trust, a national apartment company based in Houston that has 9,000 units there. But he said if oil prices stay at their current levels for three or four years, “we’ll definitely have some serious white-collar layoffs.”
“If you’re a supplier into those rigs that have shut themselves, your business just went to zero,” said Mr. Levkovich. “You don’t have a business. You have a building with some inventory.”
Letters have poured in this year from customers of Loadcraft Industries Ltd., a Texas maker of parts for oil rigs, informing them that they need to cut costs by up to 25%. “We just can’t do that,” said Terry McIver, chief executive and owner of Loadcraft.
Ramping up manufacturing for other industries, such as custom trailers, isn’t a slam dunk either. “Our main issue there is the value of the dollar,” he said, given that Canadian exporters have an advantage because of the exchange rate.
Write to Nick Timiraos at firstname.lastname@example.org
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