Plant and equipment expenditures, the four quarters of 1988.

Seskin, Eugene P. ; Sullivan, David F.

Plant and Equipment Expenditures, the Four Quarters of 1988

BUSINESS plans to spend $430.2 billion for new plant and equipment (P&E) in 1988, 10.7 percent more than in 1987, according to the BEA survey conducted in April and May (tables 1 and 2, and chart 1).(1) Spending was $388.6 billion in 1987, 2.4 percent more than in 1986.

(1) The survey covers expenditures for new facilities and for repair, expansion, or replacement of existing facilities that are chargeable to fixed asset accounts and for which depreciation or amortization accounts are ordinarily maintained. The survey excludes expenditures for land and mineral rights; maintenance and repair that are not capitalized; used plant and equipment, including that purchased or acquired through mergers or acquisitions; assets located in foreign countries; residential structures; and a few other items.

The estimates presented are universe totals of domestic P&E expenditures for all industries surveyed quarterly, which account for nearly 90 percent of capital spending by U.S. nonfarm business. Sample data are compiled from reports on a company basis, not from separate reports for plants or establishments. A company's capital expenditures are assigned to a single industry in accordance with the industry classification of the company's principal product or service.

P&E expenditures differ from nonresidential fixed investment, which is a component of GNP, in type of detail, data sources, coverage, and timing. For further information, see pages 24-25 of the February 1985 SURVEY OF CURRENT BUSINESS.

The latest estimate of planned spending for 1988 is $7.3 billion higher than that reported in April for the survey conducted in January through March. Although first-quarter spending was lower than planned, spending plans for the remainder of 1988 were revised up. The previous survey showed planned spending of $423.0 billion for 1988, 8.8 percent more than in 1987.(2)

(2) The estimates of planned spending have been adjusted for systematic reporting biases. The bias adjustments are calculated by industry for each planning horizon. For a given time period, the bias-adjustment factor is the median of the ratios of planned to actual expenditures for that time period in the preceding 8 years. Before adjustments, 1988 planned spending was $424.13 billion for "all industries," $168.55 billion for manufacturing, and $255.58 billion for nonmanufacturing industries surveyed quarterly.

Real spending -- capital spending adjusted to remove to price changes -- is estimated to increase 11.9 percent in 1988; in the previous survey, an 8.0 percent increase was estimated 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.(3) The capital goods deflator for "all industries" a projected by BEA to decline 1.1 percent in 1988; the deflator increased 0.7 percent in 1987 and 0.6 percent in 1986.

(3) Specifically, the current-dollar figures reported by survey respondents are adjusted using implicit price deflators developed for each industry from unpublished detail on current- and constant-dollar nonresidential fixed investment in the national income and product accounts. To estimate real spending, the implicit price deflator for each industry is projected using the deflator's growth over the latest four quarters for which it is available.

The latest estimates indicate a larger upward revision in planned real spending than in planned current-dollar spending because of changes in the capital goods price deflator for "all industries." The projected decline in the deflator contrasts with the 0.8-percent increase reported in April because the four quarters on which the latest projection is based now incorporate a decline in the deflator in the first quarter of 1988, rather than an increase in the first quarter of 1987. If the previously projected deflator were used to adjust the latest survey results, a 9.9-percent increase in real spending would be indicated for 1988.

Current-dollar spending in the first quarter of 1988 increased 0.1 percent to an annual rate of $409.7 billion, following a 4.1-percent increase in the fourth quarter of 1987. First-quarter spending was 3.1 percent lower than anticipated in the previous survey indicated. Plans reported in the latest survey indicate a 4.7-percent increase in the second quarter of 1988, a 2.1-percent increase in the third, and a 1.3-percent increase in the fourth.

Real spending increased 1.0 percent in the first quarter of 1988, following a 3.8-percent increase in the fourth quarter of 1987. Estimates indicated a 4.8-percent increase in the second quarter of 1988, a 2.2-percent increase in the third, and a 1.8-percent increase in the fourth.

The small increase in capital spending in the first quarter of 1988 and the upward revision in 1988 spending plans occurred when indicators of future investment activity were generally improving. In the first quarter, both new orders of durable goods and new orders of nondefense capital goods increased for the fourth consecutive quarter. Real final sales of GNP, both including and excluding transactions of the Commodity Credit Corporation, also increased in the first quarter, following little change in the fourth quarter of 1987. Manufacturing capacity utilization increased for the sixth consecutive quarter, to its highest level since the first quarter of 1980. Several indicators of corporate ability to finance capital expenditures, including domestic corporate profits (both before and after tax) and domestic corporate net cash flow, also increased in the first quarter, following declines in the fourth quarter of 1987. In addition, interest rates as measured by Moody's corporate bond yield declined, following three consecutive quarterly increases.

Manufacturing Programs

In manufacturing, current-dollar spending increased 3.2 percent in the first quarter of 1988, to an annual rate of $157.8 billion, following a 3.6-percent increase in the fourth quarter of 1987. Durable goods increased 3.7 percent in the first quarter of 1988, and nondurables increased 2.8 percent. Manufacturers plan a 3.2-percent increase in the second quarter, a 1.8-percent increase in the third, and little changed in the fourth.

For the year 1988, manufacturers plan to spend $163.0 billion, 12.1 percent more than in 1987; in the previous survey, a planned increase of 9.8 percent was reported. Manufacturers' spending increased 1.9 percent in 1987, following a 7.0-percent decline in 1986.

Durable goods industries plan a 9.5-percent increase for 1988; the largest planned increases are in blast furnaces-steel works, nonferrous metals, and electrical machinery. Large increases are also planned in "other durables," machinery (except electrical), and stone-clay glasses. Smaller increases are planned in fabricated metals and aircraft. A 4.0-percent decline is planned in motor vehicles. Nondurable goods industries plan a 14.5 percent increase for 1988; the largest planned increase is in paper. Large increases are also planned in "other nondurables," food-beverage, chemicals, petroleum, rubber, and textiles.

Real spending by manufacturers is estimated to increase 12.9 percent for 1988 -- 11.6 percent in durables and 14.2 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 declined 1.8 percent in the first quarter of 1988, to an annual rate of $251.9 billion, following a a 4.5-percent increase in the fourth quarter of 1987. Nonmanufacturing industries plan a 5.7-percent increase in the second quarter of 1988, a 2.4-percent increase in the third, and a 2.1-percent increase in the fourth.

For the year 1988, nonmanufacturing industries plan to spend $267.2 billion, 9.9 percent more than in 1987; in the previous survey, a planned increase of 8.3 percent was reported. Nonmanufacturing industries' spending increased 2.7 percent in 1987, following a 1.3-percent increase in 1986. For 1988, the largest planned increases are in air transportation, railroads, and "commercial and other."

TABLE: Table 1. -- New Plant and Equipment Expenditures by Business (Percent change from the preceding year)

 TABLE: Actual Planned
 TABLE: 1986 1987 1988
 TABLE: Oct.-Nov. Jan.-Mar. Apr.-May
 TABLE: 1987 1988 1988
 TABLE: survey survey survey

CHART 1: New Plant and Equipment Expenditures Percentage Change

TABLE: -12 -6 0 6 12 18

TABLE: Table 2. -- New Plant and Equipment Expenditures by Business in Current and Constant Dollars Billions of dollars; quarters seasonally adjusted at annual rates

 TABLE: Billions of dollars; quarters seasonally
 TABLE: adjusted at annual rates
 TABLE: 1987
 TABLE: 1986 1987 1988(1) I II III IV
 TABLE: 1988
 TABLE: I II(1) III(1) IV(1)

(1)Estimates are based on planned capital expenditures reported by business in April and May 1988. The planned expenditures are adjusted for systematic biases in reporting. The adjustment procedures are described in the February 1985 SURVEY OF CURRENT BUSINESS. Before bias adjustment, current-dollar plans for 1988 were $424.13 billion for "all industries," $168.55 billion for manufacturing, and $255.58 billion for nonmanufacturing industries surveyed quarterly.

TABLE: Table 3. -- New plant and Equipment Expenditures by Business in Constant (1982) Dollars (Percent change from preceding year)

 TABLE: Actual Planned
 TABLE: 1986 1987(r) 1988
 TABLE: Oct.-Nov. Jan.-Mar. Apr.-May
 TABLE: 1987 1988 1988
 TABLE: survey survey survey

(r)Revised

New plant and equipment expenditures shown in the table below are based on the survey conducted in January through March 1988 and include estimates, not published earlier, for nonmanufacturing industries surveyed only annually. (Estimates from the January-March survey for the manufacturing and nonmanufacturing industries surveyed quarterly were published in the April 1988 SURVEY OF CURRENT BUSINESS.) For the industries surveyed quarterly, the estimates of planned spending for 1988 shown below differ from those shown in the preceding article, which are based on the survey conducted in April and May 1988.

The nonmanufacturing industries surveyed only annually account for about 11 1/2 percent of capital spending by total nonfarm business. Current-dollar spending for the annual-only industries increased 6.8 percent in 1987; spending for new plant increased 8.0 percent and spending for new equipment increased 4.5 percent. Estimates based on the January-March survey indicate a 6.2-percent increase in planned spending for 1988, somewhat smaller than the 8.3-percent increase planned by nonmanufacturing industries surveyed quarterly.

 TABLE: Billions of dollars Percent change from TABLE:
 preceding year
 TABLE: 1986 1987 1988(1) 1988 1987 1988
 TABLE: Billions of 1982 dollars Percent change from TABLE:
 preceding year
 TABLE: 1986 1987 1988(2) 1986 1987 1988

(1)The planned expenditures are adjusted for systematic biases in reporting. The adjustment procedures are described in the February 1985 SURVEY.

(2)To estimate real spending plans, BEA adjusts the surveys results for assumed price changes.