Surge in Plant Spending

With their fingers crossed, Administration economists have been counting on a continuing boom in business spending for new plants and equipment to keep a major prop under a sliding U.S.economy this year. Their hopes now seem fully justified. After surveying the spending plans of companies large and small, the Commerce Department last week reported that businessmen plan the biggest investment increases since the early days of the Viet Nam War.

With the oil, chemical, paper, steel, aluminum and copper industries leading the way, U.S. industry now plans capital investments of $112.7 billion this year. That would mark a 13% jump over 1973 spending, which in turn was 12.8% higher than in 1972. There have been no back-to-back years with gains that large since 1965-66. And the Government's estimate is actually on the conservative side. A McGraw-Hill survey conducted mostly among larger companies last month resulted in a prediction that capital spending in 1974 will rise by 18%.

If such plans are carried out, the plant-building boom could go a long way toward offsetting declines in housing and auto production and could keep the economy from sliding into a deep recession. It also could help to relieve the severe shortages--of steel, paper, chemicals, oil, aluminum--that have plagued the economy for the past year or so. Those shortages resulted partly from inadequate investment in the late 1960s and early 1970s, and they are a prime reason for the sustained flood of new spending now. The industries planning the biggest increases in 1974 are exactly those that had the most trouble filling customers' orders last year.

Year-Long Wait. Oil executives must struggle with by far the most troublesome shortage in the entire economy, and not surprisingly they are the biggest spenders of all. This year, the industry plans investments of $7.2 billion, or 31.7% more than in 1973. About three-fourths of the money will go to increase exploration or expand production. Investments associated with marketing (the building of new gas stations, for example) are being cut way back.

The pattern is the same in several other key industries. Paper mills last year found themselves unable to meet demand for products ranging from newsprint to grocery bags to cardboard boxes. This year, industry executives plan to increase spending on new factories and machinery by 34.4%, to $2.5 billion. Demand for steel far outstripped supply last year. Now the biggest steel users, the automakers, are cutting back orders sharply, but the nation's mills still cannot melt and roll steel fast enough to fill the needs of other customers. So, steelmen expect to boost 1974 capital spending by 30%, to $1.8 billion.

Even these ambitious plans, however, may not serve to relieve shortages fully. For one thing, there is widespread doubt that businessmen will be able to raise capital spending as rapidly as they would like. The companies that manufacture production machinery are being hard pressed to keep up with the burst of orders, and shortages have appeared in that field too. During 1973 investment plans were constantly delayed by construction and delivery bottlenecks, and the same thing is likely to happen this year. Oilmen, for example, are ordering so many new drilling rigs that they must wait at least a year for delivery, and a shortage of pipe has become so critical that some oil companies are pulling casings out of pumped-out wells to sink into new ones.

Mild Inflation. In some of the most capacity-short industries (steel and paper, for example), a large chunk of 1974 capital spending will go not to expand production but to control pollution. The steel industry, while spending heavily on new plants, machinery and pollution-control devices, has closed many older plants or portions of them rather than make the improvements required by federal, state or local environmental agencies. Then, too, some of the planned increases in 1974 capital spending will be eaten up by inflation, even though inflation in capital goods has been relatively mild by current U.S. standards. Last year the cost of putting up factories and buying production machinery rose about 6%; the Council of Economic Advisers expects a similar increase in 1974. That is little more than half of the 11.4% rate at which consumer prices have been rising during the past six months. Still, a 6% rise in construction and machinery costs would turn a 13% dollar rise in 1974 plant and equipment spending into a 7% increase in real investment.

Some economists believe, in addition, that many corporate executives might trim their investment plans later this year if current order backlogs dwindle because of lower consumer demand. That is a distinct threat in the automobile industry, which when the survey was taken officially clung to plans to plunk down $2.9 billion this year, or 25.4% more than in 1973. A continuing sharp drop in sales caused General Motors to announce last week that it will delay completion of new assembly plants in Oklahoma City and Memphis. Airlines, already hit hard by an unexpected drop in passenger traffic and soaring fuel costs, are delaying taking delivery on new planes that they ordered long ago. As a result, their 1974 spending probably will drop 12.4%, to $2.1 billion.

Postwar High? Administration economists point out that as of now factory order backlogs are still rising. The Government reported last week that new orders for manufactured goods jumped in January to a record $80.9 billion, rebounding surprisingly from a sharp December decline. Shipments ran nearly $2 billion lower, so the backlog of unfilled orders increased to a record $117.7 billion.

If this year's capital spending fails to fully relieve shortages, the outcome will have its brighter side: it will mean that businessmen will be under pressure to spend heavily next year as well. Alan Greenspan, a member of TIME'S Board of Economists, already is predicting an 11% rise in 1975 plant and equipment outlays. Should that happen, investment increases for the four-year period 1972-75 would average 11.4% a year, a record unequaled in the entire post-World War II era.

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