Feb. 2, 2001, 8:10PM

Higher energy bills slowing expansion

By MARY KANE Newhouse Service

Last summer, while most people beat the heat with air conditioning without giving their energy bills a thought, Gary Huss sweated bullets.

That's because Huss' company, Hudapack Metal Treating of Elkhorn, Wis., was hit with huge increases in natural-gas bills. Its two plants were shelling out an additional $40,000 a month to fuel metal-treatment furnaces -- nearly a half-million dollars more in energy costs per year.

Such an extra cost doesn't just bust a budget. For Hudapack, it meant imposing a hiring freeze, possibly canceling profit-sharing bonuses and holding up plans for upgrading furnaces and other equipment. As a supplier to the auto sector and other industries facing international competition, Hudapack couldn't solve the problem simply by passing on higher costs to consumers, either.

"We're being squeezed," Huss said.

So are many other companies. The record economic expansion has been marked by spending on equipment and other improvements. That has sent productivity to its highest levels in four decades. But the spending slowed last summer as the economy began to cool. A key factor: sharp increases in energy costs.

The spike highlights how businesses and consumers alike were spoiled by low energy costs throughout the 1990s. Although advances in computers and technology often get the credit for the expansion, relatively low and stable energy costs also played a part, experts say.

Low prices for oil and natural gas freed up cash for spending on things such as plants and equipment -- improvements that made companies more productive and efficient. And energy prices remained fairly stable throughout the 1990s, allowing predictability in managing inventories and work forces.

That began to change last year. Prices for oil and natural gas began to climb, catching many businesses by surprise. The price of oil, which hit an unusually low $12 per barrel after the Asian crisis in 1998, jumped 37 percent between the last quarter of 1999 and the fourth quarter of 2000, and now hovers around $30 per barrel. Natural gas prices rose even more dramatically, by 128 percent, Department of Energy figures show.

That cut right to the heart of productivity, forcing businesses to stop spending on long-term improvements in order to pay higher utility bills.

At the same time, consumers -- faced with their own higher utility bills and the higher interest rates that the Federal Reserve Board imposed to slow the economy -- cut back their spending. So on top of everything else, businesses were stuck with inventory.

Business spending on new equipment peaked in June of last year at $57 billion. It dwindled in the next few months to $51 million in December, Commerce Department figures show.

Add to that the utility crisis in California, where images of rolling brownouts and darkened office buildings regularly receive the national spotlight, and it's not hard to see why businesses seem cautious about new investments.

"It's getting a little scary," said David Wyss, chief economist with Standard & Poor's in New York. "I don't think this is going to be a major recession, but it's going to be a hairbreadth escape."

Wyss and other economists worry in particular about a slowdown in business spending because it goes to the heart of the new economy.

-- Swissrose (cellier@azstarnet.com), February 05, 2001