Doubts on US economy curtail buying the engines of industry
Capital investment, one of the primary engines driving the United States economy, is just barely ticking along. Bulldozers, machine tools, mainframe computers, new factories, industrial robots -- they're all a part of the hard goods that American business needs to stay competitive. It is crucial that businesses purchase these goods, economists say, to propel the economy forward.Skip to next paragraph
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But with chronic industrial overcapacity, weak consumer demand, and the uncertainties of tax reform, US industry -- with some notable exceptions -- has been hesitant to sink vast sums into fixed investments like plants and equipment.
Although it represented just 13 percent of US gross national product last year, capital investment by corporations is seen as central to any strong movement toward a stronger economy.
``Even though capital spending is not the major portion, it is highly volatile, and it plays a big role in the fluctuations in aggregate demand,'' says Kenneth L. Judd, associate professor of managerial economics at Northwestern University's Kellogg School.
With that key role in mind, economists say 1986 will probably be a mediocre year for capital spending, even if consumer demand picks up. That feeling is based partly on a 10.1 percent drop in corporate capital investment in the first quarter of this year from the fourth quarter of last year.
``To some extent, we're coming off a couple of years of very strong growth, and a slowdown is seen as almost inevitable, since fixed investments tend to be cyclical,'' says Nigel Gault, a senior economist with Data Resources Inc., a Lexington, Mass., consulting firm.
But economists also say the nation's economic portrait is a lot brighter than it might have been, thanks to the steep drop in the price of oil. Inflation has been slowed as a result. Lower interest rates are pitching in as well.
Yet federal monetary policies to brake inflation have produced a weak labor market and a sluggish economy, according to Lawrence Klein, professor of economics at the University of Pennsylvania's Wharton School. He says, however, that the government is ``changing its policy, to move toward more fiscal responsibility and less monetary control.''
``The really big thing for judging the future [growth of the economy] depends on how [capital] investment responds to the new business conditions, specifically the money markets,'' Professor Klein says.
As interest rates at home drop, along with the dollar's value abroad, the results should bring the stronger economy (spurred on by more capital investment) that is predicted for 1987 and '88.
Still, with chronic overcapacity burdening much of US industry, analysts say it does not seem likely that demand for capital goods will be strong this year. US industry operated at just over 80 percent capacity in 1985 -- ``not a number that implies big expansion,'' says Professor Judd.
There is concern among economists about the growing chunk of corporate fixed investment dollars being commanded by imports, which doesn't lend any helpful kick to the US economy.
``Some of these [US capital goods] industries are going to have to become net exporters,'' Judd says. ``As the value of the dollar decreases, capital goods producers will have to return to selling overseas.''
Nowhere has competition between US and overseas hard goods manufacturers been more fierce than in the heavy equipment industry, where prices for bulldozers and backhoes can run well over $200,000.
``There has been quite a shift in our major competition to the point where most of it is now from overseas,'' says Gil Nolde, a spokesman for Caterpillar Tractor Company.
``International Harvester used to be our biggest competitor. International no longer exists. The No. 2 heavy equipment maker is [Japan's] Komatsu.''
Caterpillar is still the world's largest maker of heavy equipment. But it hasn't been easy for it to stay there.
Although 1981 was a record year for Caterpillar, the company lost money the next three years because of a sudden drop in demand. Oil-exporting countries stopped buying equipment; third-world countries deep in debt stopped buying; and major road building in the US dried up. During that period Caterpillar was shut out of the Soviet market by Reagan administration action.
In 1980, 130,000 pieces of heavy equipment were sold. But demand bottomed out in 1983, when only 98,000 were sold, Mr. Nolde says. Current sales for the market are above 100,000 units.
To stay profitable, Nolde says, Caterpillar has cut its manufacturing floor space by 25 percent. That includes shutting six plants ``to get better in line with changed demands.''
Running counter to trends, Caterpillar is continuing its capital investment with a $1 billion plant to modernize operations over the next five years. It has cut manufacturing costs by 20 percent, and better engineering has improved the productivity of the equipment it makes.
Even with improved exchange rates, however, economists say that the dollar volume pumped into traditional industries which produce capital goods (such as heavy equipment and machine tools) will likely continue downward.
Dr. Klein says most investment flowing to new industries is going to semiconductor technology, biotechnology, office products, medical services, feed grains, and software. Left in the dust are steel, machine tools, and heavy equipment.
``For hundreds of years we've had such shifts,'' Klein says. ``That process is always going on.''