Plant and equipment expenditures, first and second quarters and second half of 1986.

Seskin, Eugene P. ; Sullivan, David F.

Plant and Equipment Expenditures, First and Second Quarters and Second Half of 1986

BUSINESS plans to spend $395.1 billion for new plant and equipment (P&E) in 1986, 2.3 percent more than in 1985, according to the BEA survey conducted in January through March (tables 1 and 2, chart 5).(1) Spending was $386.4 billion in 1985, 9.0 percent more than in 1984.

1. The survey covers expenditures both for new facilities and for expansion or replacement of existing facilities that are chargeable to fixed asset accounts and for which depreciation or amortization accounts are ordinarily maintained. The survey excludes expenditures for land and mineral rights; maintenance and repair; used plant and equipment, including that purchased or acquired through mergers or acquisitions; assets located in foreign countries; residential structures; and a few other items.

The estimates presented are universe totals of domestic P&E expenditures for all industries surveyed quarterly, which account for about 90 percent of capital spending by U.S. nonfarm business. Sample data are compiled from reports on a company basis, not from separate reports for plants or establishments. A company's capital expenditures are assigned to a single industry in accordance with the industry classification of the company's principal product or service.

P&E expenditures differ from nonresidential fixed investment, which is a component of GNP, in type of detail, data sources, coverage, and timing. For further information, see pages 24-25 of the February 1985 SURVEY OF CURRENT BUSINESS.

The latest estimate of planned spending for 1986 is $1.6 billion higher than that reported in December for the survey conducted in October and November. The previous survey showed planned spending of $393.5 billion for 1986, 2.4 percent more than in 1985.(2) The increase indicated by the latest survey is similar to that reported in the previous survey because estimates of 1985 actual spending and 1986 planned spending were both revised upward in the latest survey. The revision in 1986 spending plans reflects a downward revision in the first half that is more than offset by an upward revision in the second half. Among the revisions, substantial downward revisions in planned spending by petroleum manufacturing and by mining apparently reflect reassessments resulting from recent sharp declines in petroleum prices.

2. The estimates of planned spending have been adjusted for systematic reporting biases. The bias adjustments are calculated by industry for each planning horizon. For a given time period, the bias-adjustment factor is the median of the ratios of planned to actual expenditures for that time period in the preceding 8 years. Before adjustments, 1986 planned spending was $394.47 billion in "all industries,' $159.35 billion in manufacturing, and $235.12 billion in nonmanufacturing.

Real spending--capital spending adjusted to remove price changes--is estimated to increase 0.9 percent in 1986; the comparable estimate based on the previous survey showed a 1.4-percent increase.3 Real spending increased 7.5 percent in 1985, following an increase of 15.1 percent in 1984 (tables 2 and 3). Estimates of real spending are calculated from survey data on current-dollar spending and from estimated capital goods price deflators developed by BEA.4 The capital goods deflator for "all industries' is projected by BEA to increase 1.3 percent in 1986, following a 1.4-percent increase in 1985.

3. Real, or constant-dollar, estimates are now expressed in 1982 dollars.

4. Specifically, the current-dollar figures reported by survey respondents are adjusted using implicit price deflators derived from unpublished detailed estimates in the national income and product accounts of current- and constant-dollar nonresidential fixed investment (adjusted to a P&E basis). To estimate planned real spending, the implicit price deflator for each industry is projected using its growth rate over the latest four quarters for which it is available.

Survey respondents, on the other hand, expect an increase of 4.2 percent in prices of capital goods purchased in 1986. They reported a 4.1-percent increase for 1985, compared with the expected 5.1-percent increase reported in the year-earlier survey (table 4). In 14 of the 16 years these data have been collected annually, respondents have overestimated capital goods price increases by an average of about 2 percentage points.

Current-dollar spending in the fourth quarter of 1985 increased 2.3 percent, to an annual rate of $397.7 billion, following a 0.3-percent increase in the third; fourth-quarter spending was 2.3 percent higher than anticipated in the previous survey. Plans reported in the latest survey indicate a 1.8-percent decline in the first quarter of 1986, a 2.6-percent increase in the second, and a 0.3-percent decline from the first to the second half of 1986.

Real spending increased 1.9 percent in the fourth quarter of 1985, following little change in the third. Estimates indicate a 2.3-percent decline in the first quarter of 1986, a 2.3-percent increase in the second, and a 0.8-percent decline from the first to the second half of 1986.

Other highlights of the survey are:

Current-dollar spending for new plant increased 4.2 percent in 1985; spending for new equipment increased 11.5 percent. For plant, real spending increased 0.7 percent, and for equipment, 11.1 percent (table 5).

Manufacturers expect their sales to increase 6.8 percent in 1986, following a 2.9-percent increase in 1985; they had expected a 9.2 percent increase in 1985. In nonmanufacturing, trade firms expect a 6.6-percent increase in 1986, following a 3.6-percent increase; they had expected a 9.7-percent increase in 1985. Public utility firms expect a 2.6-percent increase in 1986, following a 0.8-percent decline; they had expected a 5.8-percent increase in 1985 (table 6).

Manufacturers expect the prices of the products and services they sell to increase at a slightly higher rate in 1986 than in 1985 (table 7). They expect these prices to increase 3.2 percent in 1986; they reported a 2.7-percent increase for 1985, compared with an expected 3.9-percent increase. Public utility firms expect a 2.1-percent increase in 1986; they reported a 3.2-percent increase for 1985, compared with an expected 3.5-percent increase.

The planned increase in 1986 capital spending is considerably smaller than the actual increase in 1985 and may reflect uncertainty in the investment climate. Several indicators favorable to the investment outlook include fourth-quarter increases in net new capital appropriations, corporate profits and cash flow, real final sales of GNP, as well as the continued decline in interest rates. Indicators less favorable to new investment include the manufacturing capacity utilization rate, which declined in the fourth quarter and was unchanged in the first, and new orders of nondefense capital goods, which were flat in the fourth quarter. Proposed changes in tax laws also contribute to the uncertain investment picture.

Manufacturing Programs

Manufacturing industries plan current-dollar spending of $151.8 billion in 1986, 0.9 percent less than in 1985; in the previous survey, a planned decline of 0.1 percent was reported. The decline in planned spending largely reflects a cutback in petroleum manufacturing, which is apparent in all functions of the petroleum industry except transportation (table 8). Manufacturers' spending increased 10.3 percent in 1985, following a 9.5-percent increase in 1984.

In 1986, a 2.9-percent planned decline in durable goods industries more than offsets a 1.1-percent planned increase in nondurables. In durables, the largest planned decline is in electrical machinery (10.7 percent); the largest planned increase is in fabricated metals (7.5 percent). Other durable goods industries plan declines or increases of less than 5 percent. In nondurables, the sizable (8.1 percent) planned decline in petroleum is more than offset by planned increases in most other industries.

Current-dollar spending in manufacturing increased 2.9 percent in the fourth quarter of 1985, following little change in the third quarter. Durable goods increased 4.2 percent in the fourth quarter, and nondurables, 1.9 percent. Manufacturers plan a 5.2-percent decline in the first quarter of 1986, a 2.3-percent increase in the second, and a 0.2-percent decline from the first to the second half of 1986.

Real spending by manufacturers is estimated to decline 1.9 percent in 1986--3.6 percent in durables and 0.5 percent in nondurables. In 1985, real spending increased 8.8 percent--9.4 percent in durables and 8.2 percent in nondurables.

Nonmanufacturing Programs

Nonmanufacturing industries plan current-dollar spending of $243.3 billion in 1986, 4.3 percent more than in 1985; in the previous survey, a planned increase of 4.1 percent was reported. Nonmanufacturing industries' spending increased 8.2 percent in 1985, following a 14.3-percent increase in 1984.

In 1986, planned increases in air transportation (28.5 percent), "commercial and other' (7.4 percent), and gas utilities (3.4 percent) more than offset planned declines in mining (12.5 percent), "other transportation' (2.6 percent), railroads (2.2 percent), and electric utilities (1.8 percent).

Current-dollar spending in nonmanufacturing increased 1.8 percent in the fourth quarter of 1985, following a 0.6-percent increase in the third. Nonmanufacturing industries plan a 0.5-percent increase in the first quarter of 1986, a 2.7-percent increase in the second, and a 0.3-percent decline from the first to the second half of 1986.

Real spending by nonmanufacturing industries is estimated to increase 2.9 percent in 1986; it increased 6.7 percent in 1985. Estimated increases for 1986 in "commercial and other' (6.7 percent) and transportation (1.1 percent) more than offset estimated declines in mining (13.7 percent) and public utilities (1.5 percent).

Table: 1.--New Plant and Equipment Expenditures by Business

Table: CHART 5 New Plant and Equipment Expenditures

Table: 2.--New Plant and Equipment Expenditures by Business in Current and Constant Dollars

Table: 3.--New Plant and Equipment Expenditures by Business in Constant (1982) Dollars

Table: 4.--Prices of Capital Goods Purchased

Table: 5.--Expenditures for New Plant and for New Equipment by Business in Current and Constant Dollars

Table: 6.--Business Sales

Table: 7.--Prices of Products and Services Sold by Manufacturing in Utility Companies

Table: 8.--Petroleum Industry Expenditures for New Plant and Equipment, by Function