Cutting Back the Orders

During most of the nation's yearlong slide into recession, the strongest element in the economy was businessmen's willingness to spend on new equipment and expanded facilities. Companies were eager to buy because they expected the slowdown to be short and shallow, and as recently as last month the backlog of orders for capital goods still stood at a healthy total of $75.5 billion. Those orders and the pent-up corporate demand that they represent have served as a welcome moderating influence on the depth and duration of the recession.

More Cutting. Now, however, as frightened consumers retreat further into their shell and unsold goods pile up, the capital spending boom is fading. Discounted for inflation, it has been dropping for the past six months and is sure to fall even more in 1975 (see chart). The result: an even greater likelihood that the recovery, when it comes, will be low and slow.

The first sign of a weakening in the capital boom came in late summer, when real spending declined slightly for a full quarter for the first time in four years. The spending slide has continued since then; the fourth quarter is expected to be off by about 2.4%. What happened? For one thing, there was a lot of "water" in the capital-goods backlog--excess orders spread among several suppliers by companies merely waiting to see who would deliver first. Then came the coal strike and the disastrous auto sales figures from Detroit; says Michael Evans, president of Chase Econometrics Associates, a Manhattan forecasting firm: "All the water got squeezed out of the order numbers. Then everyone panicked and cut some more." Prospects for the year ahead are for more cutting. Depending on which forecast is used, real business spending is expected to drift down by 3% to 6% in 1975.

Unsold Autos. The most frugal buyers next year will probably be auto firms, airlines, textile makers and producers of "white collar" office equipment like computers. Electric utilities will hold their expenditures to about $17 billion next year, little changed from 1974; yet because of inflation, their outlays will be down in real terms for the first time in years. Most forecasts agree that the biggest spenders in 1975 will be coal, copper and other mining companies, which plan to increase their capital outlays by a dramatic 40%, to $4 billion, the petroleum industry (up 35%) and iron and steel firms (up 30%).

To spur more capital spending by making business equipment less expensive to buy, President Ford has asked Congress to lift the investment tax credit across the board to 10%, or an additional 6% for utilities and 3% for other corporations. Yet even if Congress passes the measure, as expected, it is unlikely to quickly offset the combination of factors that are drying up business spending.

Most companies are likely to want to defer expansion programs at least until they can unload the Mt. Everests of unsold goods they have accumulated. Last week the Commerce Department disclosed that largely because of the buildup of unsold autos, business inventories in October rose $5.6 billion, the biggest monthly jump so far this year. Many industries are already operating at only 80% of capacity; they see no urgent reason to increase their production potential in the face of signs that corporate profits may plunge 15% to 20% next year and so long as consumers continue to keep their hands deep in their pockets.

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