Plant and equipment expenditures, the four quarters of 1986.

Seskin, Eugene P. ; Sullivan, David F.

Plant and Equipment Expenditures, the Four Quarters of 1986

CAPITAL spending plans by business were again revised downward and now indicate a decline for 1986, according to the BEA survey conducted in July and August.1 Business plans to spend $379.6 billion for new plant and equipment (P&E) in 1986, 1.9 percent less than in 1985 (tables 1 and 2, and chart 1). Spending was $387.1 billion in 1985, 9.2 percent more than in 1984.

1. The survey covers expenditures both for new facilities and for 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; 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.

Compared with the survey conducted in April and May, the latest survey shows widespread downward revisions across both manufacturing and nonmanufacturing industries; the downward revisions are sharpest in durable goods manufacturing. The latest estimate of planned spending for 1986 is $7.7 billion lower than that reported in the previous survey; the previous survey showed planned spending of $387.2 billion for 1986, 0.2 percent more than in 1985.2 The earlier surveys of 1986 spending plans-- conducted in October and November 1985 and in January through March 1986--showed increases of slightly more than 2 percent for 1986.

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, 1986 planned spending was $378.71 billion in "all industries,' $147.56 billion in manufacturing, and $231.15 billion in nonmanufacturing industries surveyed quarterly.

Real spending--capital spending adjusted to remove price changes--is estimated to decline 2.5 percent in 1986 (table 3). Real spending increased 8.7 percent in 1985, following an increase of 15.8 percent in 1984. Estimates of real spending are calculated from survey data on current-dollar spending using estimated capital goods price deflators developed by BEA.3 The capital goods deflator for "all industries' is projected by BEA to increase 0.6 percent in 1986, following a 0.5-percent increase in 1985.(4)

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 its growth rate over the latest four quarters for which it is available.

4. The growth rates in the deflator for "all industries' for 1985 and 1986 have been revised downward due to revisions in the underlying national income and product account (NIPA) data. The industry estimates most affected by the NIPA revision were petroleum manufacturing and mining (due to a downward revision in the deflator for petroleum and natural gas structures) and finance and insurance (due to a downward revision in the deflator for office, computing, and accounting machinery).

Current-dollar spending in the second quarter of 1986 declined 0.5 percent, to an annual rate of $375.9 billion, following a 5.0-percent decline in the first; second-quarter spending was 3.0 percent lower than anticipated in the previous survey. Plans reported in the latest survey indicate small increases in the third and fourth quarters--1.2 percent and 0.9 percent, respectively. These increases in the second half of 1986, if realized, would result in fourth-quarter spending at an annual rate of $384.0 billion, 3.5 percent below the fourth-quarter 1985 rate.

Real spending declined 0.5 percent in the second quarter of 1986, following a 5.9-percent decline in the first. Estimates indicate a 1.5-percent increase in the third quarter and a 1.1-percent increase in the fourth.

The real spending decline of 6.4 percent from the fourth quarter of 1985 to the second quarter of 1986 is the first multiquarter decline since the 15.2-percent, six-quarter decline from the third quarter of 1981 to the first quarter of 1983; that decline was associated with the 1981-82 business cycle contraction (chart 2). The current decline is the first multiquarter decline not associated with a business cycle contraction since the 2.9-percent, three-quarter decline from the fourth quarter of 1966 to the third quarter of 1967.

The continued decline in capital spending in the second quarter of 1986 and the widespread downward revisions in spending plans for the year occurred when general indicators of future investment activity were mixed. Indicators favorable to investment activity in the second quarter include increases in corporate profits (both before and after tax), corporate net cash flow, and real final sales of GNP. In addition, interest rates continued their downtrend; for example, Moody's corporate bond yield registered its eighth consecutive quarterly decline. Indicators unfavorable to investment activity include a sharp drop in net new capital appropriations and declines in new orders of nondefense capital goods and in the manufacturing capacity utilization rate. Further, the tax reform bill under consideration by Congress may be contributing, on balance, to the downward revisions in spending plans. The bill's provision for the retroactive elimination of the investment tax credit could be having a direct, negative effect on capital spending that--at least in the short term--would tend to offset the positive effects of other provisions in the bill, such as lower tax rates on corporate profits.

Manufacturing Programs

In manufacturing, current-dollar spending declined 1.6 percent in the second quarter of 1986, to an annual rate of $141.7 billion, following a 9.0-percent decline in the first. A 3.5-percent decline in second-quarter spending by nondurable goods industries more than offset a 0.5-percent increase by durables. Manufacturers plan a 0.7-percent increase in the third quarter and a 3.4-percent increase in the fourth.

For the year 1986, manufacturers plan to spend $144.0 billion, 6.2 percent less than in 1985; in the previous survey, a planned decline of 2.6 percent was reported. Manufacturers' spending increased 10.6 percent in 1985, following a 19.5-percent increase in 1984.

Durable goods industries plan a 6.9-percent decline in 1986; the largest planned decline is in machinery (except electrical), 16.9 percent. Other notable declines are planned in motor vehicles, 12.4 percent; blast furnaces-steel works, 10.5 percent; stone-clayglass, 6.8 percent; and electrical machinery, 6.3 percent. Aircraft and fabricated metals plan increases of 11.9 percent and 11.7 percent, respectively. Compared with the previous survey, the largest downward revisions in planned 1986 spending are in motor vehicles, machinery (except electrical), and blast furnaces-steel works. The downward revision in motor vehicles is consistent with announced cut-backs in capital spending plans. The downward revision in machinery (except electrical) may be related to weak demand for farm machinery, machine tools, and computers due to sluggish economic growth and increased foreign competition. The downward revision in blast furnaces-steel works is consistent with the sharp second-quarter drop in the industry's capacity utilization rate, which may be reflecting strong foreign competition as well as the increasing substitution of other materials in applications formerly using iron and steel.

Nondurable goods industries plan a 5.5-percent decline in 1986. A large planned decline in petroleum, 27.5 percent, and smaller ones in textiles, 7.0 percent, and food-beverage, 0.2 percent, more than offset planned increases in other nondurables industries. The largest planned increase in the nondurables industries is in "other nondurables,' 14.4 percent, and is led by printing-publishing. Compared with the previous survey, the largest downward revision in planned 1986 spending is in petroleum. The downward revision in petroleum in the latest survey follows even larger downward revisions reported in the January-March and April-May surveys and appears to reflect continued attempts by many firms to cut costs in the face of further declines in petroleum prices in the second quarter.

Real spending by manufacturing is estimated to decline 7.0 percent in 1986-6.0 percent in durables and 7.9 percent in nondurables. In 1985, real spending increased 10.1 percent--10.5 percent in durables and 9.7 percent in nondurables.

Nonmanufacturing Programs

In nonmanufacturing, current-dollar spending increased 0.1 percent in the second quarter of 1986, to an annual rate of $234.2 billion, following a 2.4-percent decline in the first. Nonmanufacturing industries plan a 1.5-percent increase in the third quarter and a 0.6-percent decline in the fourth.

For the year 1986, nonmanufacturing industries plan to spend $235.6 billion, 0.8 percent more than in 1985; in the previous survey, a planned increase of 2.1 percent was reported. Nonmanufacturing industries' spending increased 8.4 percent in 1985, following a 14.3-percent increase in 1984.

In 1986, the largest increase is planned in air transportation, 22.6 percent; "commercial and other' plans an increase of 5.8 percent. The largest decline is planned in mining, 28.9 percent; notable declines are also planned in electric utilities, 6.9 percent; railroads, 6.9 percent; and "other transportation,' 4.4 percent. Compared with the previous survey, the largest downward revision in planned 1986 spending is in mining, 8.5 percent, and is concentrated in oil and gas extraction, apparently reflecting the continued decline in petroleum prices.

Real spending by nonmanufacturing industries is estimated to increase 0.5 percent in 1986; it increased 7.8 percent in 1985. Estimated increases in "commercial and other,' 6.7 percent, and transportation, 1.3 percent, offset estimated declines in mining, 32.9 percent, and public utilities, 5.6 percent.

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

Photo: CHART 1 New Plant and Equipment Expenditures

Photo: CHART 2 Real Plant and Equipment Expenditures, All Industries: Cyclical Peaks and Troughs