Plant and equipment expenditures, 1984.

Seskin, Eugene P. ; Landefeld, J. Steven

Plant and Equipment Expenditures, 1984

NONFARM business in the United States plans to spend $333.3 billion for new plant and equipment in 1984, 9.9 percent more than in 1983, according to the annual survey conducted by BEA in late November and December (table 1 and chart 10).1 The latest estimate for 1983 spending is $303.2 billion, 4.2 percent less than in 1982, according to the quarterly survey conducted a month earlier.2

1. The series consists of nonfarm expenditures for new plant and equipment (P&E)--both for replacement and expansion--for use in the United States, including most costs that are chargeable to fixed asset accounts and for which depreciation or amortization accounts are ordinarily maintained. The series excluded 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 coverage of the series and the pattern of estimates differ from those of the nonresidential fixed investment (NRFI) component of GNP. The major differences in coverage are the inclusion in the GNP component of investment by farmers, certain outlays charged as current expenses by business, reimbursable expenditures for new motor vehicles purchased by employees for business use, and certain transactions in used plant and equipment. The pattern of estimates may differ due to timing because the NRFI series reflects construction put in place and shipments of equipment, whereas the P&E series reflects expenditures.

2. The 1983 estimate is based on actual expenditures in the first three quarters and plans for the fourth quarter. The plans, collected by BEA in October and November, were adjusted for systematic reporting biases. The adjustments were made for each major industry group for each quarter of the year by taking the median deviation between planned and actual spending for that quarter in the preceding 8 years.

The 1984 plans were also adjusted for systematic reporting biases. The adjustments were made for each major industry group when planned spending deviated from actual spending in the same direction in at least 5 of the last 7 years. When this criterion was met, an adjustment was made by taking the median deviation between planned and actual spending for the preceding 5 years. Before adjustment, planned spending was $127.94 billion in manufacturing and $203.79 billion in nonmanufacturing.

The 1984 capital spending plans adjusted by BEA for price changes indicate an increase in real spending of 9.4 percent (table 2). The latest estimate of real spending for 1983 indicates a decline of 3.5 percent from 1982. The estimates of real spending are computed from survey data on current-dollar spending and from capital goods price deflators prepared by BEA. The deflators prepared for 1984 incorporate survey respondents' price expectations. Specifically, the current-dollar figures reported by survey respondents are adjusted using implicit price deflators for each major industry group prepared by BEA based on unpublished data in the national income and product accounts. The industry deflators for 1984 are extrapolated based on a combination of survey respondents' price expectations and the rates of change in industry deflators during the latest four quarters for which such data are available.3 The deflators indicate a 0.5-percent increase in capital goods prices in 1984; the latest estimates indicate that capital goods prices declined 0.7 percent in 1983. Survey respondents reported a 5.1-percent price increase for 1983 and expect a 6.0-percent increase in 1984 (table 3). Respondents have overestimated capital goods price increases in 13 of the 14 annual surveys conducted since 1969.

3. Respondents were asked:

"What are your best estimates of average price changes from 1982 to 1983 and expected price changes from 1983 to 1984:

"a. Prices paid by your company for new construction, machinery, and equipment.

"b. Prices of goods and/or services sold by your company.'

The companies' responses on capital goods and sales price changes were weighted by their reported capital expenditures and sales, respectively.

If the spending plans are realized, 1984 capital spending would turn out to be relatively strong for the second year of an economic recovery (table 4). The 9.4-percent real increase would be almost 2 percentage points above the average real increase in the second full year of recovery for the six previous post-1950 economic recoveries. Relative to the previous economic recoveries, planned spending in manufacturing is particularly strong, while that in nonmanufacturing-- with the exception of mining and public utilities--is slightly weaker. Nevertheless, 1984 real capital spending in manufacturing would still be below its peak-1981 level because of large declines of 9.1 percent and 5.6 percent in 1982 and 1983, respectively. Real capital spending in nonmanufacturing --which declined 3.3 percent and 2.3 percent in 1982 and 1983, respectively --would be above its 1981 level, but still below its peak-1979 level.

Industry plans

Manufacturing industries plan a current-dollar spending increase of 13.3 percent in 1984, compared with a 7.1-percent decline in 1983. Durables industries plan a 16.4-percent increase and nondurables, a 10.7-percent increase. In durables, the largest increases are expected in motor vehicles, 33.7 percent; electrical machinery, 24.1 percent; and fabricated metals, 21.3 percent. In nondurables, the largest increases are expected in rubber, 16.1 percent; "other nondurables,' 14.0 percent; petroleum, 12.8 percent; and paper, 11.7 percent.

Nonmanufacturing industries plan a current-dollar spending increase of 8.0 percent in 1984, compared with a 2.4-percent decline in 1983. The largest increase is expected in gas utilities, 20.2 percent. Increases ranging between 14 1/2 and 9 percent are planned in railroads, mining, "communication and other,' trade and services, and "other transportation.' Electric utilities plan spending at about the same level as last year, while a sizable 31.4-percent decline is planned in air transportation.

Estimates of planned real spending in 1984 indicate a 13.0-percent increase in manufacturing--15.9 percent in durable goods and 10.0 percent in nondurables. The latest estimates for 1983 indicate a decline of 5.6 percent--7.8 percent in durables and 3.3 percent in nondurables. A 7.4-percent increase in 1984 real spending is estimated in nonmanufacturing, with increases in all major industry groups except transportation. The latest estimate for 1983 indicates a decline of 2.3 percent.

Sales and sales prices

Manufacturers expect their sales to increase 11.5 percent in 1984 (table 5). Sales in 1983 increased 6.4 percent, compared with an expected 10.3-percent increase. Trade firms expect an increase of 9.1 percent in 1984; they reported a 5.7-percent increase for 1983, compared with an expected 7.1-percent increase. Public utilities expect an 8.4-percent increase in 1984 revenues; they reported a 2.4-percent increase in 1983, compared with an expected 14.7-percent increase.

Manufacturers expect the prices of the goods and services they sell to increase at a slightly higher rate in 1984 than in 1983 (table 6). They expect prices to increase 4.7 percent in 1984, compared with a 3.1-percent increase in 1983; a year ago, they had expected a 5.0-percent increase. Public utilities expect a 7.6-percent increase in 1984; they reported a 9.3-percent increase in 1983, compared with an expected 12.6-percent increase.

Table: Expenditures for New Plant and Equipment by U.S. Nonfarm Business, 1981-84

Table: Real Expenditures for New Plant and Equipment by U.S. Nonfarm Business, 1981-84

Table: Change in Prices of Capital Goods Purchased

Table: Real Plant and Equipment Expenditures During the Second Year of Economic Recovery.

Table: CHART 10; Changes in Business Investment

Table: Percent Change in Business Sales

Table: Change in Prices of Products and Services Sold by Manufacturing and Utility Companies