Plant and equipment expenditures, first and second quarters and second half of 1987.

Seskin, Eugene P. ; Sullivan, David F.

Plant and Equipment Expenditures, First and Second Quarters and Second Half of 1987

BUSINESS plans to spend $390.8 billion for new plant and equipment (P&E) in 1987, 3.0 percent more than in 1986, according to the BEA survey conducted in January through March (tables 1 and 2, and chart 6).1 Spending was $379.3 billion in 1986, 2.0 percent less than in 1985.

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 1987 is $6.6 billion higher than that reported in December 1986 for the survey conducted in October and November. The previous survey showed planned spending of $384.2 billion for 1987, 0.9 percent more than in 1986.(2) The year-to-year increase indicated in the latest survey is larger than that reported in the previous survey primarily because estimates of 1987 planned spending were revised up; 1986 spending was slightly lower than had been planned.

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, 1987 planned spending was $390.82 billion for "all industries,' $152.34 billion for manufacturing, and $238.48 billion for nonmanufacturing industries surveyed quarterly.

Real spending--capital spending adjusted to remove price changes--is estimated to increase 1.8 percent in 1987. Real spending declined 3.1 percent in 1986, following an increase of 8.7 percent in 1985 (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' is projected by BEA to increase 1.2 percent in 1987, following a 1.1-percent increase in 1986; the deflator increased 0.5 percent in 1985.

3. Specifically, the current-dollar figures reported by survey respondents are adjusted using implicit price deflators derived from unpublished detailed national income and product account estimates of current- and constant-dollar nonresidential fixed investment (adjusted to a P&E basis). To estimate planned real spending, the implicit price deflator for each industry is projected using the deflator's growth rate over the latest four quarters for which it is available.

Survey respondents, on the other hand, expect an increase of 3.7 percent in prices of capital goods purchased in 1987; they had expected a 4.2-percent increase for 1986 in the year-earlier survey (table 4). Respondents have consistently expected larger capital goods price changes than were indicated by the BEA capital goods price deflator for "all industries.' In 12 of the 16 years for which data are available, respondents' expectations of capital goods price increases have exceeded changes in the capital goods price deflator by an average of more than 2 1/2 percentage points.

Current-dollar spending in the fourth quarter of 1986 increased 3.8 percent, to an annual rate of $388.7 billion, following a 0.4-percent decline in the third; fourth-quarter spending was 1.4 percent lower than anticipated in the previous survey. Plans reported in the latest survey indicate a 1.2-percent decline in the first quarter of 1987, a 3.2-percent increase in the second, and a 0.3-percent increase from the first to the second half of 1987.

Real spending increased 3.6 percent in the fourth quarter of 1986, following a 1.1-percent decline in the third. Estimates indicate a 1.6-percent decline in the first quarter of 1987, a 2.8-percent increase in the second, and little change from the first to the second half of 1987.

The 3.6-percent real spending increase in the fourth quarter of 1986 follows declines in the first three quarters. From the fourth quarter of 1985 to the third quarter of 1986, real spending declined 7.3 percent--the first decline since the 15.2-percent, six-quarter decline associated with the 1981-82 business cycle contraction (chart 7). If plans for 1987 are realized, second-half real spending will be 4.2 percent lower than the record high in the fourth quarter of 1985.

The increase in capital spending in the fourth quarter of 1986 and the upward revisions in 1987 spending plans occurred when indicators of future investment activity were generally improving. Corporate profits, both before and after tax, increased in the last three quarters of 1986 after declining in the first. A related measure of corporate ability to finance capital expenditures, corporate net cash flow, increased in the third and fourth quarters of 1986, after declining in the first and second. Interest rates, as measured by Moody's corporate bond yield, registered their tenth consecutive quarterly decline in the fourth quarter. Real final sales of GNP, a measure of overall demand, continued to increase in the fourth quarter; the manufacturing capacity utilization rate increased slightly in the fourth quarter, but remained below its level of a year earlier. Other indicators were mixed in the fourth quarter. Both new orders of durable goods and new orders of nondefense capital goods registered their second consecutive quarterly increases, while net new capital appropriations registered their fourth consecutive quarterly decline.

Manufacturing Programs

In manufacturing, current-dollar spending increased 4.9 percent in the fourth quarter of 1986, to an annual rate of $146.0 billion, following a 1.7-percent decline in the third. Durable goods increased 2.0 percent in the fourth quarter, and nondurables increased 7.8 percent. Manufacturers plan a 2.1-percent decline for the first quarter of 1987, a 3.1-percent increase for the second, and a 0.4-percent decline from the first to the second half of 1987.

For the year 1987, manufacturers plan to spend $144.9 billion, 1.5 percent more than in 1986; in the previous survey, a planned decline of 2.0 percent was reported. Manufacturers' spending declined 7.0 percent in 1986, following a 10.6-percent increase in 1985.

Durable goods industries plan a 2.2-percent increase in 1987. Planned increases in blast furnaces-steel works, nonferrous metals, electrical machinery, stone-clay-glass, "other durables,' and fabricated metals more than offset planned declines in aircraft, motor vehicles, and machinery (except electrical). The largest planned increase, 39.3 percent, is in blast furnaces-steel works; it follows an 18.9-percent decline in 1986 and may be related to a provision in the Tax Reform Act of 1986 that allows steelmakers to carry forward unused investment tax credits. The largest planned decline, 11.2 percent, is in aircraft; it follows a 10.2-percent increase in 1986 and may be related to the 1986 decline in profits and a new military procurement policy that places more responsibility for research and design costs on defense contractors, thereby reducing funds available for capital expenditures.

Nondurable goods industries plan a 0.8-percent increase in 1987. Planned increases in "other nondurables,' textiles, food-beverage, and chemicals more than offset planned declines in petroleum, rubber, and paper. The largest planned increase, 17.1 percent, is in "other nondurables'; it follows a 10.8-percent increase in 1986. Within "other nondurables,' the largest planned increase is in printing-publishing, which is continuing to apply new computer technologies to many phases of its operations. The largest planned decline, 10.6 percent, is in petroleum; it follows a 32.1-percent decline in 1986. Within petroleum manufacturing, planned 1987 declines in the transportation, production, and "other' functions significantly outweigh planned increases in both the marketing and the refining and petrochemicals functions (table 5).

Real spending by manufacturers is estimated to change little in 1987; a 1.3-percent increase in durables offsets a 0.9-percent decline in nondurables. In 1986, real spending declined 8.3 percent--5.5 percent in durables and 10.6 percent in nondurables.

Nonmanufacturing Programs

In nonmanufacturing, current-dollar spending increased 3.1 percent in the fourth quarter of 1986, to an annual rate of $242.7 billion, following a 0.5-percent increase in the third. Nonmanufacturing industries plan a 0.7-percent decline for the first quarter of 1987, a 3.2-percent increase for the second, and a 0.8-percent increase from the first to the second half of 1987.

For the year 1987, nonmanufacturing industries plan to spend $245.9 billion, 4.0 percent more than in 1986; in the previous survey, a planned increase of 2.7 percent was reported. Nonmanufacturing industries' spending increased 1.2 percent in 1986, following an 8.4-percent increase in 1985.

For 1987, planned increases in "other transportation,' "gas and other utilities,' "commercial and other,' and air transportation more than offset planned declines in mining, railroads, and electric utilities. The large planned increase of 9.9 percent in "other transportation' follows a 4.7-percent decline in 1986. Within "other transportation,' the largest planned increase is in trucking, where deregulation has led to heightened competition and efforts by many firms to expand their services. The large planned increase of 8.9 percent in "gas and other utilities' follows a 1.5-percent decline in 1986. Within "gas and other utilities,' the largest planned increase is in "other utilities,' which includes water utilities and environmental control firms; many of these firms may be expanding and modernizing in response to recent legislation regarding hazardous waste disposal and drinking water protection. The largest planned decline, 10.2 percent, is in mining; it follows a 29.2-percent decline in 1986. Within mining, the largest planned decline is in oil and gas extraction and may reflect current relatively low oil prices and uncertainty about future oil prices.

Real spending by nonmanufacturing industries is estimated to increase 2.8 percent in 1987; it increased 0.5 percent in 1986. An estimated increase in "commercial and other' more than offsets estimated declines in mining, public utilities, and transportation.

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. Highlights include:

Current-dollar spending for new plant declined 5.1 percent in 1986, while spending for new equipment declined 0.5 percent. Real spending for plant declined 9.8 percent, while real spending for equipment showed little change (table 6).

Manufacturers expect a 7.0-percent increase in sales for 1987, following a 0.3-percent decline in 1986; they had expected a 6.8-percent increase for 1986. In nonmanufacturing, trade firms expect a 6.7-percent increase for 1987, following a 2.8-percent increase; they had expected a 6.6-percent increase for 1986. Public utility firms expect a 0.4-percent increase for 1987, following a 9.6-percent decline; they had expected a 2.6-percent increase for 1986 (table 7).

Manufacturers expect a 3.2-percent increase in the prices of the products and services they sell for 1987; they reported a 1.4-percent increase for 1986. They had expected a 3.2-percent increase for 1986. Public utility firms expect a 0.7-percent decline for 1987; they reported a 3.4-percent decline for 1986. They had expected a 2.1-percent increase for 1986 (table 8).

Table: 1.--New Plant and Equipment Expenditures by Business

Table: 2.--New Plant and Equipment Expenditures by Business in Current and Constant Dollars

Table: 3.--New Plant and Equipment Expenditures by Business in Constant (1982) Dollars

Table: 4.--Prices of Capital Goods Purchased

Table: 5.--Petroleum Industry Expenditures for New Plant and Equipment, by Function

Table: 6.--Expenditures for New Plant and for New Equipment by Business in Current and Constant Dollars

Table: 7.--Business Sales

Table: 8.--Prices of Products and Services Sold by Manufacturing and Utility Companies

Photo: CHART 6 New Plant and Equipment Expenditures

Photo: CHART 7 Real Plant and Equipment Expenditures, All Industries: Cyclical Peaks and Troughs