Plant and equipment expenditures, the four quarters of 1987.

Seskin, Eugene P. ; Sullivan, David F.

Plant and Equipment Expenditures, the Four Quarters of 1987

BUSINESS plans to spend $390.9 billion for new plant and equipment (P&E) in 1987, 3.1 percent more than in 1986, according to the BEA survey conducted in April and May (tables 1 and 2, and chart 1).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 little changed from that reported in April for the survey conducted in January through March. The previous survey showed planned spending of $390.8 billion for 1987, 3.0 percent more than in 1986.(2) An upward revision in manufacturing industries offsets a downward revision in nonmanufacturing industries.

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 $384.38 billion for "all industries,' $150.16 billion for manufacturing, and $234.22 billion for nonmanufacturing industries surveyed quarterly.

Real spending--capital spending adjusted to remove price changes--is estimated to increase 2.8 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 0.3 percent in 1987, following a 1.2-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.

The latest estimates indicate a larger upward revision in planned real spending than in planned current-dollar spending because the latest projected increase in the capital goods price deflator for "all industries' is lower than the 1.2-percent increase reported in April. (The four quarters on which the latest projection is based now incorporate a decline in the deflator in the first quarter of 1987, rather than an increase in the deflator in the first quarter of 1986.) If the previously projected deflator were used to adjust the latest survey results, a 1.8-percent increase in real spending would be indicated for 1987.

Current-dollar spending in the first quarter of 1987 declined 4.2 percent, to an annual rate of $372.2 billion, following a 3.8-percent increase in the fourth quarter of 1986; first-quarter spending was 3.1 percent less than anticipated in the previous survey. Plans reported in the latest survey indicate a 5.3-percent increase in the second quarter of 1987, a 1.3-percent increase in the third, and a 1.3-percent increase in the fourth.

Real spending declined 4.0 percent in the first quarter of 1987, following a 3.4-percent increase in the fourth quarter of 1986. Estimates indicate a 5.3-percent increase in the second quarter of 1987, a 1.5-percent increase in the third, and a 1.4-percent increase in the fourth.

The decline in capital spending in the first quarter of 1987 was somewhat sharper than the planned decline reported in the previous survey and may reflect effects of the Tax Reform Act of 1986 (TRA) as well as other factors influencing investment. Because of the TRA, business may have shifted expenditures from 1987 into the fourth quarter of 1986 in order to qualify for depreciation in 1986. (Even so, fourth-quarter spending was lower than planned.) The TRA also lowered corporate profits after tax, which declined in the first quarter, following three quarterly increases, while corporate profits before tax increased in the first quarter. A related measure of corporate ability to finance capital expenditures, corporate net cash flow, increased for the third consecutive quarter. Other indicators of future investment activity were mixed in the first quarter. Interest rates, as measured by Moody's corporate bond yield, registered their 11th consecutive quarterly decline. Real final sales of GNP, excluding transactions of the Commodity Credit Corporation, were unchanged, following 17 consecutive quarterly increases; the manufacturing capacity utilization rate increased for the third consecutive quarter. Both new orders of durable goods and new orders of nondefense capital goods declined, after increasing for two quarters, while net new capital appropriations increased, after declining for four quarters.

Manufacturing Programs

In manufacturing, current-dollar spending declined 4.5 percent in the first quarter of 1987, to an annual rate of $139.4 billion, following a 4.9-percent increase in the fourth quarter of 1986. Durable goods declined 1.4 percent in the first quarter of 1987, and nondurables declined 7.5 percent. Manufacturers plan a 5.4-percent increase in the second quarter, a 1.1-percent increase in the third, and a 0.3-percent increase in the fourth.

For the year 1987, manufacturers plan to spend $145.9 billion, 2.2 percent more than in 1986; in the previous survey, a planned increase of 1.5 percent was reported. Manufacturers' spending declined 7.0 percent in 1986, following a 10.6-percent increase in 1985.

Durable goods industries plan a 2.6-percent increase for 1987. The largest planned increase is in blast furnaces-steel works. Increases are also planned in electrical machinery, "other durables,' nonferrous metals, and stone-clay-glass. Declines are planned in motor vehicles, machinery (except electrical), aircraft, and fabricated metals. Nondurable goods industries plan a 1.9-percent increase. Planned increases in textiles, "other nondurables,' and food-beverage more than offset planned declines in rubber, petroleum, paper, and chemicals.

Real spending by manufacturers is estimated to increase 1.8 percent in 1987--2.3 percent in durables and 1.4 percent in nondurables. In 1986, real spending declined 8.3 percent--5.6 percent in durables and 10.6 percent in nondurables.

Nonmanufacturing Programs

In nonmanufacturing, current-dollar spending declined 4.0 percent in the first quarter of 1987, to an annual rate of $232.9 billion, following a 3.1-percent increase in the fourth quarter of 1986. Nonmanufacturing industries plan a 5.3-percent increase in the second quarter, a 1.4-percent increase in the third, and a 1.9-percent increase in the fourth.

For the year 1987, nonmanufacturing industries plan to spend $245.0 billion, 3.6 percent more than in 1986; in the previous survey, a planned increase of 4.0 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,' air transportation, "commercial and other,' and gas utilities more than offset planned declines in railroads, mining, and electric utilities.

Real spending by nonmanufacturing industries is estimated to increase 3.4 percent in 1987; it increased 0.4 percent in 1986. Estimated increases in "commercial and other' and transportation more than offset estimated declines in mining and public utilities.

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

Table: CHART 1 New Plant and Equipment Expenditures

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