Lagging Expenditures

In the brisk upward march of the economy from the nation's worst postwar recession, the relatively free-spending consumer has so far led the way. In marked contrast, spending by businessmen for new plant and equipment, which is critical to sustaining the business upturn, has been notably laggard. True, corporate capital spending is at last increasing, and most experts believe that it will reach satisfactory levels late this year. But others are worried that the outlays are coming too late, and that as the economy speeds up, industrial capacity will run into production bottlenecks and shortages that will kick off another round of destructive inflation. Meanwhile, trying to predict when a new business spending surge will occur has become a favorite guessing game of economists and businessmen.

Corporate spending has usually trailed other indexes in past recoveries largely because businessmen are reluctant to build new factories or order new machinery until rising demand puts back into use existing capacity that had been idled by recession. But the current drag in business spending has lasted longer and has been more pronounced than usual. Measured even in current dollars, capital spending fell from a peak annual rate of $116.2 billion in the fourth quarter of 1974 to $111.8 billion at the end of last year, and recovered in the first quarter of 1976 only to $114.7 billion. Measured in dollars of the same purchasing power as in early 1974, the drop has been much sharper, the recovery so far has been tiny, and the level is still far below the 1974 peak.

Though many of the recent impediments to vigorous industrial expansion --heavy corporate debt, tight money markets, huge surplus capacity--are now fading, the extent of increases in business spending this year is still uncertain. Alan Greenspan, chairman of the Council of Economic Advisers, believes that business spending has lagged --largely because of the general uncertainty in recent years. Greenspan expects capital expenditures this year to increase about 5% in constant dollars over last year and says that "the 1977 capital investment outlook is exceptionally good." According to the Commerce Department's latest survey of business spending intentions, plant and equipment spending for all of 1976 should rise 7.3% above last year.

Bad Start. Other experts are less enthusiastic. Otto Eckstein, a member of TIME Board of Economists, is forecasting a 5% spending rise (discounted for inflation) this year and an additional 8.2% boost in 1977--which would still leave capital expenditures substantially below 1974 levels. Chase Econometrics Chief Michael Evans believes business spending is "off to a bad start. Much of the increase in capacity being planned will not be available in time."

Adding to the concern is a study by Rinfret-Boston Associates, an economic consulting firm to business, which contends that industry is much closer to operating at full capacity--and running into inflationary shortages--than the official figures of the Federal Reserve Board indicate. According to the board, U.S. industry on average was using only 78.6% of its capacity in the first quarter of this year. But the Rinfret firm reports that 40% of the industries it surveyed were operating at more than 85% of capacity in April, and that the figure will be "significantly higher" by December.

Making the confusion worse, spending and spending plans differ widely from industry to industry--and even from company to company in the same industry. Some of the biggest capital spenders are electric utilities, which are rushing to keep up with ever rising demand, and textile makers, who are in the midst of a boom. In the auto industry, where sales are soaring, Ford will increase its spending 40%, to $1.4 billion this year, and Chrysler will raise outlays 18%, to $450 million. But GM's planned spending of $2.5 billion will only about match last year's pace.

Some notable laggards are makers of petrochemicals and oil refiners. Kaiser Industries Corp. Vice President Louis Oppenheim says there is "some reluctance" in the steel industry to expand capacity substantially. The key reason, he asserts, is that rising costs of labor, energy and raw materials, plus the industry's inability to raise prices fast enough, result in "a return on investment that is too low." Another factor in the reluctance of businessmen to spend more is the still high cost of long-term borrowing. Says Litton Industries Financial Affairs Vice President Joseph T. Casey: "In our spending outlook we pay a lot less attention to the level of future demand than we do to what makes sense at 9% money [the rate on many corporate bond issues] instead of 4%."

Whatever course businessmen eventually follow, the worst fears of production bottlenecks and inflationary material shortages seem farfetched at present. Consumers have not launched a spending spree so frenetic that it could lead to an overheated economy by the end of next year. Still, the possibility does exist, and until corporations begin to open their purses in earnest, spending plans will continue to attract anxious attention.

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