Plant and equipment expenditures.

Sullivan, David F. ; Seskin, Eugene P.

Plant and Equipment Expenditures

Quarters of 1987

First and Second Quarters of 1988

Year 1988

BUSINESS plans to spend $419.0 billion for new plant and equipment (P&E) in 1988, 7.3 percent more than in 1987, according to the BEA survey conducted in October and November (tables 1 and 2, and chart 1.)1 The latest estimate for 1987 spending is $390.6 billion, 2.9 percent more than in 1986, and is 0.4 percent higher than the estimate reported in September for the survey conducted in July and August.2

1. Survey questionnaires were mailed October 1, with a due date of November 16. Responses were received beginning October 9. Most were received by the processing cutoff date of December 1, although, as is typical, a small number were received after the cutoff and those significant to the results were added to the sample tabulations.

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 to 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.

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 $387.57 billion for "all industries," $148.67 billion for manufacturing, and $238.90 billion for nonmanufacturing industries surveyed quarterly, and 1988 planned spending was $420.18 billion for "all industries," $167.74 billion for manufacturing, and $252.44 billion for nonmanufacturing industries surveyed quarterly.

Real spending--capital spending adjusted to remove price changes--is also estimated to increase 7.3 percent in 1988. The latest estimate of real spending for 1987 indicates an increase of 2.3 percent from 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" is projected by BEA to show no change in 1988, following a projected 0.6-percent increase in 1987; the deflator increased 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 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.

Current-dollar spending in the third quarter of 1987 increased 4.1 percent, to an annual rate of $393.1 billion, following a 0.9-percent increase in the second; third-quarter spending was 1.2 percent lower than anticipated in the previous survey. Plans reported in the latest survey indicate a 6.1-percent increase in the fourth quarter, a 2.6-percent increase in the first quarter of 1988, and a 0.3-percent increase in the second.

Real spending increased 4.7 percent in the third quarter of 1987, following a 0.7-percent increase in the second. Estimates indicate a 6.3-percent increase in the fourth quarter, a 2.4-percent increase in the first quarter of 1988, and a 0.3-percent increase in the second.

The large increase in capital spending in the third quarter of 1987, the upward revision in fourth-quarter spending plans, and the formulation of plans for the sizable increase for 1988 occurred when many indicators of future investment activity were improving. Corporate profits before tax increased in the third quarter, for the sixth consecutive quarter; corporate profits after tax increased for the second consecutive quarter. A related measure of corporate ability to finance capital expenditures, corporate net cash flow, also increased, showing a stronger increase than in the second quarter. Real final sales, both including and excluding transactions of the Commodity Credit Corporation, increased for the second consecutive quarter. The manufacturing capacity utilization rate increased in the third quarter to its highest level since the first quarter of 1980. Both new orders of durable goods and new orders of nondefense capital goods increased in the third quarter, for the second consecutive quarter.

However, the third quarter also included developments less favorable to new investment. Interest rates as measured by Moody's corporate bond yield increased for the second consecutive quarter, following 11 consecutive quarterly declines, and net new capital appropriations declined, following two large quarterly increases. In addition, stock market prices began to slide in August, with a dramatic plunge on October 19. As a result, spending plans for the year ahead may be subject to more change than usual. DRI/McGraw-Hill, which conducted its survey of capital spending plans slightly earlier than BEA and also reported strength for 1988 spending, planned a follow-up telephone survey for mid-December to determine if firms' spending plans have been changed.

Manufacturing Programs

In manufacturing, current-dollar spending increased 4.8 percent in the third quarter of 1987, to an annual rate of $147.6 billion, following a 0.1-percent increase in the second. Durable goods increased 4.4 percent in the third quarter, and nondurables increased 5.2 percent. Manufacturers plan a 10.1-percent increase in the fourth quarter, a 1.4-percent increase in the first quarter of 1988, and a 0.8-percent increase in the second.

For the year 1988, manufacturers plan to spend $159.8 billion, 8.1 percent more than in 1987; the latest estimate of spending for 1987 indicates an increase of 3.6 percent from 1986. Manufacturers' spending declined 7.0 percent in 1986.

Durable goods industries plan a 3.0-percent increase for 1988. The largest planned increases are in blast furnaces-steel works and nonferrous metals, 14.1 percent and 13.0 percent, respectively. The planned increase in blast furnances-steel works follows the large increase planned for 1987 and may reflect the industry's highest capacity utilization rate since 1981, voluntary import restraints, and a provision of the Tax Reform Act of 1986 that allows steelmakers to carry forward unused investment tax credits. The planned increase in nonferrous metals may reflect both the industry's high capacity utilization rate and recent price increases for the industry's products. Increases are also planned in electrical machinery, "other durables," fabricated metals, and machinery (except electrical). Declines are planned in aircraft, motor vehicles, and stone-clay-glass.

Nondurable goods industries plan a 13.0-percent increase for 1988. The largest planned increase is in paper, 25.3 percent, and may reflect major expansion projects planned for the near future by several large firms. Increases of more than 10 percent are also planned in "other nondurables," petroleum, and chemicals. The planned increase in "other nondurables," which is led by tobacco and printing-publishing, may reflect the industry group's highest capacity utilization rate since 1984. The planned increase in petroleum, which follows a small planned increase in 1987 and a large decline in 1986, may depend on the course of petroleum prices; these prices stabilized in the third quarter, but have fallen more recently. The planned increase in chemicals may reflect the industry's highest capacity utilization rate since 1974, in part resulting from strong export demand for chemical products. Smaller increases are planned in food-beverage, rubber, and textiles.

Real spending by manufacturers is estimated to increase 8.6 percent in 1988--3.4 percent in durables and 13.4 percent in nondurables. The latest estimate of spending for 1987 indicates an increase of 3.1 percent from 1986.

Nonmanufacturing Programs

In nonmanufacturing, current-dollar spending increased 3.7 percent in the third quarter of 1987, to an annual rate of $245.6 billion, following a 1.4-percent increase in the second. Nonmanufacturing industries plan a 3.8-percent increase in the fourth quarter, a 3.3-percent increase in the first quarter of 1988, and a slight decline in the second.

For the year 1988, nonmanufacturing industries plan to spend $259.2 billion, 6.8 percent more than in 1987; the latest estimate of spending for 1987 indicates an increase of 2.5 percent from 1986. Nonmanufacturing industries' spending increased 1.3 percent in 1986.

For 1988, the largest planned increase is in air transportation, 16.4 percent, and is consistent with the record amount of new equipment now on order, in terms of both value and capacity. Smaller increases are planned in gas utilities, "commercial and other," mining, railroads, and "other transportation." A decline is planned in electric utilities.

Real spending by nonmanufacturing industries is estimated to increase 6.5 percent for 1988. The latest estimate of spending for 1987 indicates an increase of 1.9 percent from 1986. For 1988, the largest increase is estimated for "commercial and other"; increases are also estimated for mining and transportation. A small decline is estimated for public utilities.

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

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

Table: CHART 1 New Plant and Equipment Expenditures

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