Factory Investment Grows 10.5%

Over the last four years, U.S. companies have invested in new and more efficient factories at nearly three times the pace of the previous decade, a big reason the U.S. economy has been able to grow by almost 3.5% over the last year without a surge in inflation, according to government figures released Monday.

After declining during the first two years of the decade, investment in U.S. plants and equipment grew at an average 10.5% a year for the last four years. The gain, which compares with an average of 3.8% during the 1980s, was paced by rising investment in information processing, computers and industrial equipment, according to the Federal Reserve Board.

This investment boom caused capacity at U.S. factories to grow 4.1% last year, more than double the 2% recorded in 1993 and the highest rate since the 1960s, according to the Fed’s figures.

Such growth in the economy at one time would have outstripped manufacturers’ capacity to produce, economists say, and led to inflation-causing bottlenecks. As a result, Fed policymakers would likely have been inclined to push borrowing costs higher to cool growth.

However, the rate of business investment has enabled U.S. factories to meet the increased demand without the need to rely on older, more inefficient plants and therefore without any need to raise prices.

American business has provided “a supportive environment for continued investment both in terms of equipment and plant expansion,” Fed Gov. Susan Phillips said. “The business investment side, I think, is continuing to support growth.”

For many years, Fed officials accepted that growth above 2% to 2.5% would trigger inflation. But while the economy grew at a 5.9% annual rate in the first quarter, inflation has all but disappeared.

The consumer price index rose at a 1.4% pace for the first five months of this year, compared with a 3.8% increase for the first five months of 1996. And prices at the wholesale level have fallen in each of the first five months of 1997, marking the first time that has happened since Harry Truman was in the White House. June’s producer price report, due Friday, is expected to show little change in that trend.

Separately Monday, a private employment-tracking firm reported that the number of planned job cuts by major U.S. businesses declined in June from a year earlier, as many industries coped with worker shortages.

Planned cuts decreased 62.4% last month, to 15,091 from 40,163 in June 1996, according to the survey by the employment firm Challenger, Gray & Christmas. June’s level was the lowest since 14,086 in May 1993.

Business staffing is very lean. “Just a few years ago, companies bemoaned a costly surplus of employees and job cuts were rampant as a result. Now just the opposite is true,” said John Challenger, executive vice president of Challenger, Gray & Christmas.

For the first half of the year, the number of announced dismissals was 31% below a year earlier, Challenger said.

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Job Cuts

Number of planned job cuts by major U.S. businesses, in thousands:

June, 1997: 15.1

Source: Challenger, Gray & Christmas