Firms Plan to Hike Capital Outlays

The Commerce Department said Tuesday that American businesses plan to boost investment spending by 2.8% this year. But private economists said even this modest increase is unlikely, given a sluggish economy and rising interest rates.

Weak economic growth and heavy foreign competition forced a 3.1% reduction in business capital spending in 1986, the biggest drop since the depths of the 1981-82 recession.

In its latest survey, the government estimated that spending by businesses on expansion and modernization would total $384.6 billion this year, after removing the effects of inflation.

The new survey was completed in May and represents a revision from a March poll that put the increase this year at a lower 1.8%.

But private economists said they believed that the new figure overstated the strength in investment. They predicted that U.S. industry will end up scaling back on current plans as the year progresses in the face of continued sluggish overall economic growth.

Analysts said the survey did not reflect the full impact of a big jump in interest rates this spring caused by investor concerns over rising inflation. Rising interest rates make it more costly for businesses to finance expansion plans.

More Pessimism Now

“If the government took the same survey today, you would find a lot more pessimism among businessmen because interest rates have gone up so much,” said Michael Evans, head of a Washington consulting firm. “People are postponing investment plans, waiting to see if interest rates come down and economic growth picks up.”

Sara Johnson, senior economist at Data Resources Inc. in Lexington, Mass., predicted that investment spending would decline by about 0.8% this year as benefits from an improving trade performance are offset by other factors.

“The investment climate is not as healthy as we would like to see because of both the upswing in interest rates and tax reform,” she said.

The new tax law, which went into effect on Jan. 1, removed a variety of tax breaks once bestowed on businesses to encourage capital investments.

The rise in interest rates, which was triggered by growing investor concerns about inflation, has caused some analysts to revise downward their estimates for overall economic growth as measured by the gross national product.

Evans said he believed that the GNP would actually decline at an annual rate of 1% in the current quarter and post only a sluggish 2% growth rate in the second half of the year.

Big Drop in Spending

The new survey, taken after businesses had the actual spending totals for the first quarter, showed a giant 4% drop in investment spending in the first three months of the year. But businesses boosted expectations for the remainder of 1987, predicting gains of 5.3% in the current April-June quarter, 1.5% in the third quarter and 1.4% in the fourth quarter.

By industry, the government survey found manufacturers expecting to boost investment spending by 1.8% this year while non-manufacturing industries have plans for a 3.4% increase.

The mining industry, which includes oil and gas drilling activities, forecast a 7.2% drop in investment spending this year following a huge 32.1% plunge in 1986, a result of the steep drop in oil prices.

The overall business spending increase for 1987, if realized, would be the first gain since an 8.7% advance in 1985. Last year’s 3.1% decline was the largest since a 7.9% plunge in 1982. Spending also fell 1.1% in 1983, reflecting the steep recession and sharply reduced factory operating rates.

Before removing the effects of inflation, the government estimated that business investment spending would total $390.9 billion this year, a 3.1% increase over 1986.