Businesses Plan for New Capital Spending Highs

Despite rising interest rates, U.S. businesses plan to boost plant and equipment spending to record levels this year as capital investment remains one of the strongest sectors of the economy, the government reported Thursday.

The Commerce Department said a survey found that businesses plan to spend $429.4 billion, after adjusting for inflation, topping the previous high of $391.6 billion set in 1985.

This 11.6% increase over the 1987 spending total, if realized, would mark the biggest percentage jump since a 16.6% rise in 1984, when American industry was still recovering from the steep 1981-82 recession.

“Capital spending is the main driving force in the economy at the present time, and there are no signs that it is going to ease off,” said Allen Sinai, chief economist of Boston Co.

Slowdown Expected in ’89

So far this year, business spending on plant and equipment and a boom in export sales have accounted for almost three-fourths of total economic growth.

The two developments are closely related, as American manufacturers have rushed to expand production facilities in an effort to meet growing overseas demand for their goods.

Sinai estimated that one-third of U.S. industry is operating at full capacity, providing a strong incentive to boost investment. Overall, American industry is operating at 83.5% of capacity, the highest rate in eight years.

The high operating rates have led to concerns that the economy is beginning to push against capacity constraints and tight labor markets, resulting in rising inflationary pressures.

The Federal Reserve has been pushing up interest rates since late March as a way of fighting inflation by dampening demand. Economists said the rate increases so far will not likely trigger any cutbacks in investment plans this year, although they expect a slowdown in 1989.

“It takes time to make capital investment decisions so higher interest rates won’t slow this spending over the next several months,” said Jerry Jasinowski, chief economist of the National Assn. of Manufacturers.

“Companies are making major increases in capital spending to expand capacity and reduce costs through greater use of information-processing equipment,” he said, noting that half of the equipment spending in 1987 went to purchase computers and related equipment.