Leading Economic Indicators Show Signs of a Possible Slowdown in Capital Spending for Energy Related Industries

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The following is an advisory by Industrialinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). As indicated in Industrialinfo.com's 2002 Industrial Outlook (http://www.industrialinfo.com/indoutlook.htm), for the last three years, capital spending for the power and natural gas industries has reached record highs. This steep and quick upwards momentum has many wondering when the peak will occur. With manufacturing in a recession, industries are scaling back production try to reduce inventory levels. Last week, the Federal Reserve Board (FOB) and the US Department of Labor, released numbers for Industrial Production, which continues to decline month after month. Prices for both consumer and producer indexes show deflationary situations for some goods, including electricity and natural gas. As the nation enters into what may seem to be a light winter season, demand for more electricity and natural gas will decrease. Combined, this may lead to a slowdown in capital spending during 2002 for energy companies.

On November 16th, 2001, October's Industrial Production and Capacity Utilization reports indicated a 1.1 percent drop in production. Production output, a component of the index, indicated a drop in manufacturing of 1.2 percent, with mining down by 1.3 percent and utilities rising by a mere 0.6 percent. Capacity Utilization for the total combined industries fell 0.9 percent to 74.8 percent, or 7.3 percentage points below the 33-year average. Manufacturing and mining contribute to about one-third of the demand for electricity, and as production continues to drop for these industries, demand for electricity will continue to slowdown.

The US Department of Labor also released the Consumer Price Index (CPI) for November 2001. CPI for fuels and utilities declined for the fifth consecutive month. Fuel oil dropped by 4.1 percent and electricity by 1.0 percent. Natural gas prices rose by a mild 2.6 percent while gasoline prices dropped again for the fourth consecutive month, a combined 28.9 percent decrease month over month.

As the price for utilities continues to drop in line with demand, earnings for these companies will begin to suffer. Capital project feasibility studies will begin to show longer payout periods and less profitability. During a period when corporations are searching for cost cutting measures, acquisitions, and business deals that will contribute to the bottom line, board members are less likely to vote to fund larger capital expenditures until these investments can be justified.