Plant and equipment expenditures, first and second quarter and second half of 1988.

Seskin, Eugene P. ; Sullivan, David F.

Plant and Equipment Expenditures, First and Second Quarters and Second Half of 1988

BUSINESS plans to spend $423.0 billion for new plant and equipment (P&E) in 1988, 8.8 percent more than in 1987, according to the BEA survey conducted in January through March (tables 1 and 2, and chart 8). Spending was $388.6 billion in 1987, 2.4 percent more than in 1986.

The latest estimate of planned spending for 1988 is $4.0 billion higher than that reported in December for the survey conducted in October and November. The previous survey showed planned spending of $419.0 billion for 1988, 7.3 percent more than in 1987. The year-to-year increase indicated in the latest survey is larger than that reported in the previous survey, not only because 1988 planned spending was revised up, but also because 1987 actual spending was lower than had been planned. All published industries except motor vehicles now plan increases for 1988.

Real spending--capital spending adjusted to remove price changes--is estimated to increase 8.0 percent in 1988. Real spending increased 1.7 percent in 1987, following a decline of 2.6 percent in 1986 (tables 2 and 3). Estimates of real spending are calculated from survey data on current-dollar spending and from estimated capital goods price deflators developed by BEA. The capital goods deflator for "all industries" is projected by BEA to increase 0.8 percent in 1988; the deflator increased 0.7 percent in 1987 and 0.6 percent in 1986.

Survey respondents, in contrast, expect an increase of 4.2 percent in the prices of capital goods purchased in 1988; they had expected a 3.7-percent increase for 1987 in the year-earlier survey (table 4). Respondents have consistently expected larger capital goods price changes than have been indicated by the BEA capital goods price deflator for "all industries." In 13 of the 17 years for which data are available, respondents' expectations of capital goods price increases have exceeded--by an average of almost 3 percentage points--the changes in the capital goods price deflator.

Current-dollar spending in the fourth quarter of 1987 increased 4.1 percent, to an annual rate of $409.4 billion, following a 4.1-percent increase in the third. Fourth-quarter spending was 1.9 percent lower than anticipated in the previous survey; a 5.9-percent downward revision in manufacturing industries more than offset a 0.7-percent upward revision in nonmanufacturing industries. Plans reported in the latest survey indicate a 3.3-percent increase in the first quarter of 1988, a 1.0-percent increase in the second, and a 0.9-percent decline from the first half of 1988 to the second.

Real spending increased 3.6 percent in the fourth quarter of 1987, following a 4.7-pecent increase in the third. Estimates indicate a 2.8-percent increase in the first quarter of 1988, a 0.9-percent increase in the second, and a 1.2-percent decline from the first half of 1988 to the second.

The large increase in capital spending in the fourth quarter of 1987 and the upward revision in 1988 spending plans occurred when indicators of future investment activity were mixed. In the fourth quarter, several indicators of future demand were favorable to new investment: The third consecutive quarterly increases in both new orders of durable goods and new orders of nondefense capital goods; an increase in net new capital appropriations, following a decline in the third quarter and large increases in the first and second; and the fifth consecutive quarterly increase in the manufacturing capacity utilization rate, to its highest level since the first quarter of 1980. Developments in the fourth quarter less favorable to new investment included declines in domestic corporate profits, both before and after tax. The decline in profits before tax followed six consecutive quarterly increases, and the decline in profits after tax followed two consecutive quarterly increases. A related measure--domestic corporate net cash flow--also declined, following two consecutive quarterly increases. In addition, interest rates as measured by Moody's corporate bond yield increased for the third consecutive quarter, following 11 consecutive quarterly declines.

Manufacturing Programs

In manufacturing, current-dollar spending increased 3.6 percent in the fourth quarter of 1987, to an annual rate of $152.8 billion, following a 4.8-percent increase in the third. Durable goods increased 1.2 percent in the fourth quarter, and nondurables increased 5.8 percent. Manufacturers plan a 5.4-percent increase in the first quarter of 1988, a 0.2-percent increase in the second, and a 2.0-percent decline from the first half of 1988 to the second.

For the year 1988, manufacturers plan to spend $159.7 billion, 9.8 percent more than in 1987; in the previous survey, a planned increase of 8.1 percent was reported. Manufacturers' spending increased 1.9 percent in 1987, following a 7.0-percent decline in 1986.

Durable goods industries plan a 6.8-percent increase for 1988; the largest planned increased are in blast furnaces-steel works and nonferrous metals. Increases of 10 percent of more are also planned in electrical machinery, "other durables" and fabricated metals. Smaller increases are planned in machinery (except electrical), stone-clay-glass, and aircraft. A 4.8-percent decline is planned in motor vehicles. Nondurable goods industries plan a 12.6-percent increase for 1988; the largest planned increase is in paper. Increases of more than 10 percent are also planned in "other nondurables," petroleum, and food-beverage. Smaller increases are planned in chemicals, textiles, and rubber.

Real spending by manufacturers is estimated to increase 8.9 percent for 1988--6.5 percent in durables and 11.2 percent in nondurables. In 1987, real spending increased 1.1 percent--2.1 percent in durables and 0.2 percent in nondurables.

Nonmanufacturing Programs

In nonmanufacturing, current-dollar spending increased 4.5 percent in the fourth quarter of 1987, to an annual rate of $256.k billion, following a 3.7-percent increase in the third. Nonmanufacturing industries plan a 2.0-percent increase in the first quarter of 1988, a 1.5-percent increase in the second, and a 0.3-percent decline from the first half of 1988 to the second.

For the year 1988, nonmanufacturing industries plan to spend $263.o billion, 8.3 percent more than in 1987; in the previous survey, a planned increase of 6.8 percent was reported. Nonmanufacturing industries' spending increased 2.7 percent in 1987, following a 1.3-percent increase in 1986. For 1988, increases of more than 10 percent are planned in air transportation, "other transportation," and railroads. Other large increases are planned in gas utilities and "commercial and other"; smaller increases are planned in mining and electric utilities.

Real spending by nonmanufacturing industries is estimated to increase 7.5 percent in 1988; it increased 2.0 percent in 1987. For 1988, the largest increases are in transportation and "commercial and other." Smaller increases are estimated in mining and public utilities.

Other Highlights

In the January-March survey, respondents were also asked to provide information on the breakdown between plant and equipment expenditures, sales expectations, and the prices of products and services sold; respondents in the petroleum industry were also asked to provide a breakdown of capital spending by function. Highlights include:

* Current-dollar spending for new plant declined 0.9 percent in 1987, while spending for new equipment increased 3.9 percent. Real spending for plant declined 3.4 percent, while real spending for equipment increased 3.8 percent (table 5).

* Manufacturers expect a 6.8-percent increase in sales for 1988, following a 6.0-percent increase in 1987; they had expected a 7.0-percent increase for 1987. In nonmanufacturing, trade firms expect a 6.8-percent increase for 1988, following a 6.6-percent increase; they had expected a 6.7-percent increase for 1987. Public utility firms expect a 4.2-percent increase for 1988, following a 3.8-percent decline; they had expected a 0.4-percent increase for 1987 (tabel 6).

* Manufacturers expect a 3.5-percent increase in the prices of products and services they sell for 1988. They reported a 3.3-percent increase for 1987; they had expected a 3.2-percent increase. Public utility firms expect a 1.5-percent increase for 1988. They reported a 3.1-percent decline for 1987; they had expected a 0.7-percent decline (table 7).

* Petroleum manufacturing firms expect to increase spending in all functions for 1988; the largest increases are planned in transportation, marketing, and refining and petro-chemicals. In 1987, when total capital spending by the petroleum industry declined, spending declined in all functions except marketing (table 8).