Plant and equipment expenditures, the four quarters of 1986.

Seskin, Eugene P. ; Sullivan, David F.

Plant and Equipment Expenditures, the Four Quarters of 1986

BUSINESS plans to spend $387.2 billion for new plant and equipment (P&E) in 1986, 0.2 percent more than in 1985, according to the BEA survey conducted in April and May (tables 1 and 2, and chart 1). Spending was $386.4 billion in 1985, 9.0 percent more than in 1984.

The latest estimate of planned spending for 1986 is $7.9 billion lower than that reported in April for the survey conducted in January through March. The previous survey showed planned spending of $395.1 billion for 1986, 2.3 percent more than in 1985. Although downward revisions were widespread, three-fourths of the total revision was accounted for by the petroleum manufacturing and mining industries. The latest estimate for the two industries combined indicates a decline in 1986 of $10.0 billion, a decline $5.9 billion larger than reported in the previous survey; in 1985, the two industries combined showed little change in spending. (If the two industries are excluded from "all industries," the 1986 planned increase would be 3.2 percent.)

Real spending--capital spending adjusted to remove price changes--is estimated to decline 1.3 percent in 1986. Real spending increased 7.6 percent in 1985, following an increase of 15.1 percent in 1984 (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 1.5 percent in 1986, following a 1.3-percent increase in 1985.

Current-dollar spending in the first quarter of 1986 declined 5.4 percent, to an annual rate of $376.1 billion, following a 2.3-percent increase in the fourth quarter of 1985; first-quarter spending was 3.7 percent lower than anticipated in the previous survey. Plans reported in the latest survey indicate a 3.0-percent increase in the second quarter of 1986, a 0.4-percent increase in the third, and a 2.0-percent increase in the fourth.

Real spending declined 6.3 percent in the first quarter of 1986, following a 2.3-percent increase in the fourth quarter of 1985. Estimates indicate a 2.5-percent increase in the second quarter of 1986, a 0.2-percent increase in the third, and a 1.8-percent increase in the fourth.

The first-quarter decline in capital spending and the widespread downward revisions in spending plans for the year are consistent with several indicators of investment activity. Specifically, the large downward revisions in spending by petroleum manufacturing and mining are apparently related to the recent steep decline in prices of petroleum products. More generally, other unfavorable indicators include first-quarter declines in net new capital appropriations; corporate profits, both before and after tax; corporate net cash flow; new orders of nondefense capital goods; and the manufacturing capacity utilization rate. One bright spot in the investment outlook is the continued decline in interest rates. Furthermore, proposed changes in the tax laws may be influencing investment decisions and may continue to do so during the remainder of the year.

Manufacturing Programs

In manufacturing, current-dollar spending declined 9.8 percent in the first quarter of 1986, to an annual rate of $143.1 billion, following a 2.9-percent increase in the fourth quarter of 1985. Durable goods industries declined 10.7 percent in the first quarter of 1986, and nondurables, 8.9 percent. Manufacturers plan a 3.5-percent increase in the second quarter, a 0.3-percent increase in the third, and a 5.9-percent increase in the fourth.

For the year 1986, manufacturers plan to spend $149.2 billion, 2.6 percent less than in 1985; in the previous survey, a planned decline of 0.9 percent was reported. Manufacturers' spending increased 10.3 percent in 1985, following a 19.5-percent increase in 1984.

Durable goods industries plan a 1.4-percent decline in 1986; the largest planned decline is in machinery (except electrical), 7.9 percent. Stoneclay-glass and electrical machinery plan declines of 5.0 percent and 4.7 percent, respectively. Aircraft and fabricated metals plan increases of 13.9 percent and 13.2 percent, respectively. The weakness in machinery (except electrical) may be related to first-quarter declines in the industry's sales and capacity utilization rate; one of the industry's biggest customers, the electric utilities industry, has also cut back 1986 capital spending plans. The planned increase in aircraft follows a decline in 1985 and may be related to the high demand for commercial aircraft, continued high levels of defense spending, and a relatively high level of capacity utilization. The planned increase in fabricated metals may reflect the large 1985 increase in sales.

Nondurable goods industries plan a 3.6-percent decline in 1986. A large planned declined in petroleum, 24.4 percent, and a smaller one in textiles, 4.3 percent, more than offset planned increases in the other nondurable industries. The planned decline in petroleum is probably related to the continuing decline in oil prices and to lower company profits. The largest planned increase in the nondurables industries is in "other nondurables," 16.4 percent, and is led by printing-publishing, which continues to adopt new labor-saving technologies.

Real spending by manufacturers is estimated to decline 4.1 percent in 1986--2.5 percent in durables and 5.6 percent in nondurables. In 1985, real spending increased 8.8 percent--9.5 percent in durables and 8.3 percent in nondurables.

Nonmanufacturing Programs

In nonmanufacturing, current-dollar spending declined 2.6 percent in the first quarter of 1986, to an annual rate of $233.0 billion, following a 1.8-percent increase in the fourth quarter of 1985. Nonmanufacturing industries plan a 2.7-percent increase in the second quarter of 1986, a 0.4-percent increase in the third, and a 0.4-percent decline in the fourth.

For the year 1986, nonmanufacturing industries plan to spend $238.1 billion, 2.1 percent more than in 1985; in the previous survey, a planned increase of 4.3 percent was reported. Nonmanufacturing industries' spending increased 8.2 percent in 1985, following a 14.3-percent increase in 1984.

In 1986, the largest increases are planned in air transportation, 20.1 percent, and in "commercial and other," 7.0 percent. The largest declines are planned in mining, 22.2 percent; railroads, 8.8 percent; and electric utilities, 6.8 percent. The increase in air transportation is planned despite recent losses experienced by airlines and may reflect heightened competition and the recent wave of proposed mergers in the industry. In "commercial and other," much of the strength in 1986 spending plans is in retail trade and in insurance. The planned decline in mining industries is widespread, but is sharpest in oil and gas extraction, which has been adversely affected by the decline in oil prices. The planned decline in railroads may be related to lack of growth in railroad traffic and to cutbacks in the nonrail operations of railroad firms. The planned decline in electric utilities appears to result from current overcapacity in that industry; the Federal Reserve Board capacity utilization rate for electric utilities declined more than 3 percentage points, from 84.1 percent in the first quarter of 1985 to 80.7 percent in the first quarter of 1986. In addition, electric utilities have been finding it difficult to obtain rate increases from regulatory agencies to finance cost overruns or cancellations of projects, especially nuclear plants.

Real spending by nonmanufacturing industries is estimated to increase 0.6 percent in 1986; it increased 6.8 percent in 1985. An estimated increase in "commercial and other," 5.8 percent, more than offsets estimated declines in mining, 22.8 percent; public utilities, 5.7 percent; and transportation, 0.8 percent.