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June 15,1973

The Commerce Department's latest
plant-equipment survey provides
further evidence (as though any
were needed) that the nation is in
the midst of an old-fashioned cap­
ital-goods boom. The survey indi­
cates a 13-percent increase in
spending in 1973, to $100 billion, for
the sharpest gain since 1966.
The boom has been fairly slow in
getting underway— not too surpris­
ingly, in view of the fact that invest­
ment spending is generally consi­
dered a lagging cyclical indicator.
Even at that, the overall expansion
between the 1970 cyclical trough
and late 1972 was relatively moder­
ate, in comparison with the two
earlier capital-goods expansions
which began in 1963 and 1967.
Spending increased very slowly in
1971, then rose at a 12-percent
annual rate in first-half 1972 and at
an 8-percent rate in the second half
of that year. In the current half­
year, however, spending should
jump at a 17-percent annual rate,
before decelerating to an 11-per­
cent rate of increase in the JulyDecember period.
Running fast
The largest gain in expenditures for
1973 is scheduled by durable-goods
manufacturers. They increased their
spending at a healthy lOVi-percent
clip in 1972, and now plan for a 22percent increase this year, with
substantial gains promised for al­
most every industry. Nondurablegoods manufacturers actually re­
duced their spending by a small
amount last year, but now plan a



1512-percent expansion, largely
/
because of substantial outlays by
rubber, paper, and chemical manu­
facturers.
Manufacturers may simply be
making up for lost time, since their
plant-equipment outlays grew at
less than 2 percent annually over
the entire 1966-1972 period. With
the utilities, however, the situation
is different, since their expenditures
have risen at more than a 16-per­
cent annual rate throughout the last
decade—and this year again are
scheduled to rise by 16 percent.
Much of the recent spending in this
sector is due to an upsurge in
purchases of new generating facili­
ties by electric utilities.
The capital-goods boom is attribut­
able in part to the easy cash-flow
position of most corporations.
Spending has been encouraged by
the liberalized depreciation rules
adopted in mid-1971 and by the
investment tax-credit enacted near
the end of that year; with the help
of these fiscal stimuli, cash flow has
jumped about 20 percent over the
past year. Some special factors have
also been involved; nonferrousmetals and paper firms have in­
curred substantial expenditures to
meet pollution-control require­
ments, while rubber manufacturers
have built new facilities to supply
the expanded market for radial-ply
tires.
Running short
The major cause of the spending
upsurge, however, is the boom(continued on page 2)

( 7 = 3

o

o

caused jump in capacity utilization.
In 1972 alone, the proportion of
firms with inadequate facilities rose
from 30 to 40 percent of all firms
(weighted by size) and the propor­
tion evidently has risen higher since
then. (At the 1966 peak, 50 percent
of the total reported inadequate
facilities.) In April, according to the
monthly Purchasing Management
survey, three-fourths of the survey
group reported that they were oper­
ating at more than 90 percent of
capacity, and more than one-fifth
said that they were operating "be­
yond normal capacity."
In some respects, 1973 is unfolding
in a different fashion from 1972. Last
year, the emphasis seemed to be on
replacing outmoded facilities in
order to reduce costs; accordingly,
most purchases were for new
equipment, which is associated
most closely with modernization
projects. This year, equipment pur­
chases remain heavy, but purchases
of new plant have also increased to
meet looming capacity shortages.
Some make-up work is involved
here, since spending for new facto­
ries actually declined every year of
the 1970-72 period.
Overcoming capacity shortages may
be somewhat difficult because of
the limited capacity of the machinetool industry itself. Consequently,
at least a portion of the planned
1973 increase in capital spending


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Federal Reserve Bank of St. Louis

will probably be deferred into 1974.
Capacity shortages thus could
persist for some time, partly be­
cause of this deferral of spending,
and partly because of the long lead
time between the recognition of the
need for more capacity and the
actual delivery of the desired facili­
ties. The capital-goods boom now
in progress thus should be a favor­
able factor for 1974, since it takes at
least several quarters to complete
projects now underway.
Falling behind plans
Some such deferral of demand must
be behind the paradoxical failure of
actual spending to come up to
announced spending plans over the
past year or so. Normally, in a
boom period, it's the other way
around, with actual spending outs­
tripping spending plans by a wide
margin. In early 1972, the Com­
merce survey indicated a 10y2-percent increase in spending for the
year, but each successive quarterly
survey showed a smaller gain, and
the actual increase for the year
turned out to be less than 9 per­
cent. (The first quarter of 1973
showed a similar tendency.) Com­
merce analysts ran a special survey
last fall and found that these short­
falls were not due to actual cut­
backs in projects, but rather to such
factors as over-optimism in regard
to the speed with which work could
be completed. In addition, unex­
pected delays of one type or an­
other occurred in various projects—
in progress of construction, in
equipment deliveries and in pay­
ments for work done.

C=3
With developments such as these, it
is understandable that a sharp in­
crease has occurred in recent
quarters in carryover, that is, in the
amounts still to be spent on pro­
jects already underway. For manu­
facturing firms, carryover was rela­
tively stable through most of 1971
and 1972, but between last Sep­
tember and the end of March, pro­
ject backlogs rose from $10.3 billion
to $11.6 billion for durable goods,
and from $10.4 billion to $12.4 bil­
lion for nondurable-goods manufac­
turing. For public utilities, with their
necessarily long lead times, car­
ryover jumped from $25.9 billion in
March 1971 to $47.0 billion in March
1973.
Durable boom?
This expansion of carryover expend­
itures points to the durability of the
boom, and the same is true of
several other measures which all
happen to be leading cyclical indi­
cators. Capital appropriations by
manufacturing firms have increased
almost by half between early 1972
and early 1973, while two other
indicators— new orders for capital
goods and construction contracts
for new stores and factories have
jumped 25 percent or more over the
past year.
Order backlogs for durable goods
rose substantially in the second half
of 1972, and then accelerated in
first-quarter 1973 to one of the
largest gains of the past two dec­
ades. Nearly all of the entire in­
crease since mid-1972 has come
from business capital-equipment



backlogs; such backlogs increased
20 percent over this period, mostly
in the nonelectrical-machinery cate­
gory.
To keep capital spending going at a
high yet sustainable pace, some
dampening of the boom through
deferral of marginal projects would
seem to be called for. This might
well occur if monetary policy con­
tinues restrictive and interest rates
remain at their present high levels.
An obvious fiscal tool—the variable
investment tax-credit—could also
be made available to curb runaway
spending in the investment sector.
Federal Reserve Chairman Burns
has proposed the adoption of this
tool on several occasions, in its
latest version in a Paris speech just
last week. Basically, the credit
would vary over time in accordance
with business conditions— instead
of remaining at 7 percent as at
present—with the President setting
the rate subject to Congressional
approval. Our experience since
1966 suggests that variation in the
credit would significantly affect the
behavior of business investment
over the course of the business
cycle. This fiscal tool therefore
would reduce the burden on mone­
tary policy, and thus make possible
some improvement in the manage­
ment of the national economy.
William Burke

o c=3

uo}Su!nse/v\ . ge jn • u o S a jQ • epeA9N • ogepi

BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT
(Dollaram ounts in millions)
Selected Assets and Liabilities
Large Commercial Banks
Loans adjusted and investments*
Loans adjusted— total*
Commercial and industrial
Real estate
Consum er instalment
U.S. Treasury securities
Other securities
Deposits (less cash items)— total*
Demand deposits adjusted
U.S. Government deposits
Time deposits— total*
Savings
Other time I.P .C .
State and politi el s ibdivi sions
(Large negotiable CD 's)
Weekly Averages
of Daily Figures
Member Bank Reserve Position
Excess reserves
Borrowings
Net free (+ ) / Net borrowed ( - )
Federal Funds— Seven Large Banks
Interbank Federal funds transactions
Net purchases (+ ) / Net sales ( - )
Transactions: U.S. securities dealers
Net loans (+) / Net borrowings ( —)

Amount
Outstanding
5/30/73

Change
from
5/23/73

72,833
55,692
19,998
16,109
8,236
5,676
11,465
70,193
20,376
640
47,894
18,020
19,870
7,435
9,388

+ 687
+ 518
—
102
+ 78
+ 29
67
+ 236
160
+ 62
- 237
- 133
34
104
2
- 98

W eekended
5/30/73

Change from
year ago
Dollar
Percent
+ 9,872
+ 10,428
+ 3,426
+ 2,685
+ 1,381
902
+
346
+ 7,915
+ 1,429
410
+ 6,821
67
+ 4,813
+ 1,240
+ 4,310
W eeken d ed
5/23/73

+
+
+
+
+

15.68
23.04
20.67
20.00
20.15
- 13.71
+ 3.11
+ 12.71
+ 7.54
- 39.05
+ 16.61
— 0.37
+ 31.97
+ 20.02
+ 84.88
Com parable
year-ago period

19
71
52

+
-

32
48
80

+ 755

+ 320

-

697

+ 294

-2 5 5

-

107

16
439
423

-

* Includes items not shown separately.
O pinions expressed in this newsletter do not necessarily reflect the views of the Federal Reserve
Bank of San Francisco.
Information on this and other publications can be obtained by callin g or w riting the
Adm inistrative Services Departm ent. Federal Reserve Bank of San Francisco, P.O . Box 7702,
Digitized for F R A S € R ranc'sco, California 94120. Phone (415) 397-1137.