By WILL EDWARDS
BLOOMBERG NEWS
August 26, 2004

A resurgence in capital spending by companies such as The Boeing Co., Caterpillar Inc. and Verizon Communications Inc. may create jobs and strengthen the U.S. economy after its midyear lull, economists said yesterday.

Investment in equipment, plants and software boosted gross domestic product during the April-June period, adding more to economic growth than consumer spending did for the first time in nine years, figures from the Commerce Department show.

"The economic baton has to pass from the consumer to business spending," said Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis. "Without it, the recovery would be in jeopardy."

A survey published last week by PricewaterhouseCoopers LLP, the accounting and consulting firm, found that investment shows no sign of letting up: 55 percent of senior executives planned new spending, up from 41 percent a year earlier. Such spending may lead to hiring, boost productivity and make the United States more competitive in the global market.

The plans may reflect longer-term optimism in an $11 trillion U.S. economy, the world's largest, which is showing signs of being hobbled by record oil prices.

Orders to U.S. factories for non-defense capital goods other than aircraft, a gauge of business investment, rose 0.6 percent in July and were up almost 12 percent from a year earlier, the Commerce Department reported.

Shipments of those goods, a measure used by the government in calculating gross domestic product, rose 1.4 percent last month and were up almost 12 percent from a year earlier. Aircraft orders continue to lag behind the volume that Boeing, Airbus and others were experiencing before the Sept. 11, 2001, terrorist attacks.

"Industry by industry, businesses have resumed the trend of investing heavily in productivity-enhancing technologies such as new computers and industrial equipment," Jack Guynn, president of the Federal Reserve Bank of Atlanta, said in a speech yesterday. Growth in spending "is now comparable to the 1990s."

Federal Reserve policy-makers in Washington also noted that company spending when they met June 30 and raised the benchmark interest rate for the first time in four years.

Consumer spending, which accounts for more than two-thirds of GDP, slowed to a 1 percent growth rate from 4.1 percent, after higher gasoline costs discouraged other purchases. Business investment, which typically accounts for about one-tenth of GDP, grew 8.9 percent, more than twice the previous quarter's pace.

The changes were so drastic for both that investment overtook consumer spending as a contributor to growth for the first time since 1995.

Investment increased starting with the April-June period of last year after nine straight quarters of decline. The reason for the acceleration -- 10 percent growth between June 2003 and June of this year -- may be that executives were caught off guard by how rapidly the economy bounced back from the 2001 recession.

Employers laid off workers and closed plants, and they held back spending while low interest rates spurred consumers to buy cars, houses and electronics at a feverish pace. Consumer spending grew as fast as 7 percent at an annual rate in the final quarter of 2001.

"Companies have gotten too lean and too mean," said Richard Berner, chief U.S. economist at Morgan Stanley in New York and a former economist at the Fed.

Boeing, the world's second-biggest maker of commercial aircraft, behind Airbus, plans to increase capital spending to $1.5 billion in 2005 from an expected $1 billion this year. Boeing is preparing to manufacture the 7E7 Dreamliner, the new plane scheduled for first delivery in 2008.

Boeing will hire as many as 3,000 people by the end of this year, most in the Seattle area, with 1,000 jobs going to laid-off employees. It will be Boeing's biggest round of hiring since terrorists attacked New York and Washington with hijacked jetliners on Sept. 11, 2001.

"We're working very fast and furiously to meet the demand," Harry Stonecipher, Boeing's chief executive officer, told analysts and investors July 28 in a conference call.

The PricewaterhouseCoopers survey of 163 chief financial officers and managing directors during the second quarter found that 56 percent expect new hiring over the coming 12 months, compared with 35 percent of those interviewed a year earlier. U.S. employers added 32,000 jobs last month, the smallest increase this year, according to the Labor Department.

Caterpillar, the world's biggest maker of earthmoving equipment, forecast spending $850 million this year for machinery and engines, up from $654 million last year. The Peoria, Ill., company is having difficulty keeping up with orders, Lynn McPheeters, the chief financial officer, said in an interview July 22.

FedEx Corp., the second-biggest U.S. package carrier, behind United Parcel Service Inc., said Monday that it will boost capital spending this year to as much as $2.1 billion from its original plan to spend $1.6 billion.

And fighting to stay ahead of Cingular Wireless and Sprint Corp., Verizon budgeted $12 billion to $13 billion for capital spending this year. Spending this year by New York-based Verizon, the largest U.S. provider of phone services, will be the highest since $17.3 billion in 2001, according to Bloomberg data.

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