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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 http://fraser.2tlouisfed.org/ 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.