Businesses may keep their wallets closed

"We're being very cautious," says Burnett, president of Houston-based Burnett Staffing Specialists, which provides temporary help and placement services to companies from 11 offices throughout Texas, and last year had about $80 million in sales.

Revenue has fallen 4 percent to 5 percent in the past month from a year ago after being up 26 percent in the first six months of the year, she says. Tumult on Wall Street, a depressed housing market that shows no signs of improving and fresh reports of layoffs in the finance industry are all having a negative impact on her clients, which include businesses in a wide range of industries, she says. All that is starting to make her wonder if a more serious downturn is coming.

"I don't want to open another office right as the recession rolls in," she says.

Business investment, such as opening new offices as Burnett was considering, or buying new equipment and buildings, has been a key player in the economy in recent years, accounting for more than 10 percent of U.S. economic activity in 2006.

In the second quarter, business spending provided its biggest boost to the economy in more than a year, almost equal to the contribution from consumer spending. And a key measure of business spending, orders for capital durable goods excluding defense and aircraft, rose in July at the fastest pace since March.

Business spending is also a barometer of corporate sentiment, which can influence hiring, salaries and other factors that can affect consumers, the biggest driver of the $13 trillion U.S. economy.

But some economists are questioning if businesses will continue to be a pillar of strength, given the erratic stock market, a barrage of credit crunch news, and concerns that the housing market will not pick up for quite some time. Federal Reserve policymakers are closely watching how businesses react to determine if they need to cut interest rates to help prop up the economy.

"All this noise will affect people's outlook," William Dunkelberg, chief economist at the National Federation of Independent Business, says.

He's not concerned that businesses will stop spending because they can't find financing - many have a lot of cash on hand and don't need to borrow. The issue is if the wave of bad news will have a negative impact on business owners' view of where the economy is headed and lead them to exercise greater caution, like Burnett.

Watching financial TV, "you think the world is coming apart," Dunkelberg says. "The psychology there certainly is not positive."

Moody's Economy.com chief economist Mark Zandi says businesses will make or break the economy going forward.

"What businesses decide to do determines if we end up in a recession or not, both in terms of their investment and in terms of their hiring," Zandi says. "If they pull back in either, confidence will completely unravel, and we will be in recession," he says. "Odds are, businesses will hold tough. I think they'll be more cautious, but they'll remain aggressive enough to ensure the economy avoids recession. But it's a close call."

Zandi remains somewhat optimistic because businesses are holding onto so much cash, allowing them to spend money without borrowing. And corporate profits have been strong, too.

Companies outside of farming and banking had $1.5 trillion in liquid assets at the end of the first quarter, up 3.5 percent from a year ago according to the latest available data from the Federal Reserve. Earnings were up more than 10 percent in the second quarter, the biggest gain since the third quarter of last year, according to Standard & Poor's.

"The companies have a nice war chest built up," S&P's analyst Howard Silverblatt says.

Greg Stoner, president of Jasper, Ind.-based MasterBrand Cabinets, the second-largest cabinet maker in North America, says his firm will continue to invest. "We're not dependent on (credit markets) to secure loans to keep our division operating; we generate enough cash internally to satisfy our needs," Stoner says.

"We're self-funded," says Alan Schulman, owner of Glentronics, a Lincolnshire, Ill.-based manufacturer of sump pumps with battery backups sold under The Basement Watchdog brand name.

His sales are up 38 percent from a year ago, a trend he partly credits to people devoting more time to making small home improvements rather than taking on big, expensive projects or trading up to bigger homes. Sales were up even before recent flooding in the Midwest.

But business owners who have dipped their toes in the borrowing waters are giving mixed reviews, with some reporting problems even before the recent credit crunch worries emerged.

Charles Weinacker, owner of Pet Friendly of Fairhope, Ala., recently notched an unusually large $1.2 million in orders from Wal-Mart, Whole Foods and other stores. They were largely buying his organic dog food after traces of melamine were found in pet food, sparking a massive recall.

But Weinacker wasn't able to secure a line of credit from a local bank to buy boxes, labels and raw materials to fill the orders. He needed the loan, he says, because the big chains don't pay him until about two months after he delivers the merchandise. After a search of several months, Weinacker ultimately snared a $3 million line of credit, but at nearly double his typical 7 percent interest rate.

Loan officers "are scared to death, 'cause they get fired if a loan goes bad," he says. "It's just been very frustrating, because we tried to grow so damn quick."

Tom Doyle, owner of Appleton, Wis.-based robotics maker QComp Technologies, faced a similar quandary after booking $5 million in sales in just a month from food and glass industry producers. The $8 million manufacturer needed to buy parts and hire employees, but when Doyle tried to increase the company's line of credit 50 percent to $900,000, the bank asked him to pledge personal assets as collateral.

Advertising curtailed

Closer Healthcare of Tequesta, Fla., which sells mail-order diabetic supplies, has ceased all marketing - a roughly $20,000 monthly expense - because stricter lending criteria by its bank, SunTrust, has meant a lower credit limit. The firm must borrow money for such expenses because it takes insurance companies six months to pay claims, says Michael Rothenberg, company head of business development.

Growth, he says, has been cut in half. "It's unfortunate, but it's not a company-fatal event," he says. "It's just a matter of weathering a few bumps in the road."

But other firms say financing doesn't seem to be a problem. Dunkelberg, economist for the National Federation of Independent Business, says members aren't complaining about lacking access to cash. "I probably have more banks wanting me to borrow money than I can remember," says Bruce Rumpf, CEO of Job1USA, a placement firm with offices nationwide. He currently does not have plans to borrow money and says business is going well.

Stephen Grubba, head of Superior Staffing Solutions in Greer, S.C., has been talking to lenders as he ponders a possible expansion. The money is there, he says, but he's not sure now is the time to make his move.

"It seems like everybody is in a wait-and-see mode," he says of his clients, noting companies often hire based on their gut feelings of the economy, which can be influenced by the stock market and other financial news. "Businesses are very fickle sometimes."

It's such caution that would be unwelcome news for the economy. Even if companies have access to money, they have to feel confident enough to spend it and to hire to make a difference.

In a survey of more than 30 economists conducted by USA TODAY last week, nearly all marked down their forecasts for business spending in the third and fourth quarters. But the reductions were not dramatic.

"Most of the fundamentals for business investment are still quite positive," Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said last week.

"Profitability is high, and the cost of capital is still fairly low, despite recent financial market developments. Thus, investment could well maintain momentum this year," Lacker said.

Paul Villella, CEO of HireStrategy, a Reston, Va.-based job placement firm operating in the Washington, D.C., area is watching his clients closely. While businesses are going ahead with hiring plans, the time between starting the job search and closing the deal seems to be expanding, he says.

Temporary help and placement firms are often among the first to pick up on changes in business sentiment.

"I wouldn't call it hesitancy; just more caution and care," Villella says. "It's almost like (clients are asking), "Is there another shoe to drop that is going to affect my company even though we are not involved in subprime, prime or any other kind of mortgage?' "

Sam Braunstein, CEO of New York City-based Wellgate for Women, thinks this might actually be a good opportunity for small businesses such as hers, which makes orthopedic products such as wrist, ankle and knee supports designed specifically for women that are sold at major retailers, including Wal-Mart and Target.

Bigger firms face quarterly earnings reports, outside investors and short-term credit needs, while she has the luxury of focusing on longer-term plans, she says.

"For all small businesspeople who are closely held, this is a great opportunity for us to go after the big guys who are distracted," says Braunstein.