‘89 Investment Spending May Set a Record : Costs for Expansion, Modernization Could Hit $452 Billion Next Year

In good news for the economy, the government reported Wednesday that American businesses are planning to spend a record $451.64 billion on expansion and modernization plans in the new year.

The Commerce Department said a survey completed in November found that U.S. businesses are projecting a 5.9% increase in investment spending in 1989 over an expected total of $426.49 billion for 1988.

If these spending plans are realized, it would mean that 1988 and 1989 would set back-to-back spending records, surpassing the old one-year record of $395.58 billion set in 1985.

‘Understating Plans’

The boom in investment spending this year has been credited with providing much of the momentum for the overall economy. Analysts saw it as a good sign that businesses are planning to further expand investment next year, although at a slower pace.

The 5.9% rise in business investment expected for 1989 contrasts with a 10.8% jump in spending in 1988, the biggest percentage increase since a 16.6% rise in 1984.

All of the figures have been adjusted to remove the effects of inflation.

David Wyss, an economist with Data Resources Inc. in Lexington, Mass., said he expected the government survey, taken in October and November, was understating investment plans somewhat and that later investment surveys will show even more optimism.

In 1988, business investment and U.S. export sales have contributed almost half of the growth in the overall economy, which is expected to come in above 3.5% this year, as measured by the gross national product.

The record level of export sales have prompted much of the business investment as U.S. manufacturers have rushed to meet the higher overseas demand.

For 1989, Wyss said that he expected growth would slow to around 2.6%, reflecting a reduction of the improvement in the trade deficit and slower business investment.

“We think exports and investment will continue to be the strongest areas of the economy, but they won’t be as strong as they were in 1988,” Wyss said. “But a little slowdown is useful right now because the economy has really been growing too rapidly and needs to slow to a more sustainable pace.”

Adjusted for Inflation

In addition to powering growth in the new year, business investment to replace aging plants and equipment helps to boost the U.S. productivity rate, a factor of growing importance as the country tries to meet rising international competition.

The 5.9% investment increase for all industries includes a 3.5% planned boost for manufacturing companies and a 7.4% rise for companies engaged in mining, transportation and other non-manufacturing areas.

In manufacturing, the Commerce Department is projecting that spending will rise to an inflation-adjusted $170.15 billion following an even larger 12.7% increase in 1988.

The manufacturing increase includes a 2.2% rise in spending at plants making durable goods and a 4.7% increase at factories producing non-durable goods, items not expected to last three years.

Before adjusting for inflation, the department projected that spending for 1989 would rise by 6% to $455.96 billion after an anticipated increase of 10.4% this year.