Tight money hits bonds and capital spending

The din of jackhammers and the shrill whine of heavy-duty trucks still reverberate through scores of US communities as companies press ahead with large-scale construction projects.

But an increasing number of economists here expect the pounding and hammering associated with new plant construction and other capital improvement projects to grind downward to a less audible level later this year as interest rates and inflation continue at high levels and the nation edges toward recession.

While most large industrial companies are still going ahead with capital improvement projects, a number of electric utilities and small businesses are believed to be cutting back on such programs. For the year as a whole, some analysts predict, 1980 will show either little real gain in capital spending over 1979 or worse, a decline.

Small and medium-size companies are believed to be cutting back on a number of projects. It would take a "very venturesome businessman" to put together a large-scale capital improvement program at this time, says George C. Williams, president of Allied Capital, a Washington-based firm that provides venture capital to new and smaller businesses.

There is "no doubt" that many smaller companies are cutting back new programs , Mr. Williams says. This is particularly true, he says, for companies having lines of bank credit linked to the prime rate.

Reasons for slowdowns or postponement of new or planned projects are hardly a secret known only in corporate board rooms. Money costs are soaring -- even as credit lines become increasingly hard to find.

Further, if the economy were to go into a slump -- and some economists now believe that recession along the lines of the severe 1973-75 downturn cannot be totally discounted -- consumer spending would be expected to drop further as unemployment goes up.

According to the latest government measurements, released in February, most companies are going ahead with new programs. Commerce Department data indicated that US companies will spend $196.78 billion for new plant and equipment during 1980. That is up 11 percent over 1979. When inflation is factored in, however, the rise is minimal, up only 1 or 2 percent.

Further, some economists now believe that government data released later this spring, in June, could show a drop-off in the earlier projections.

* Citibank is forecasting a "sharp drop" in business investment through 1981. Specifically, the bank is forecasting a decline of 9 percent in total producers' durable equipment through mid-1981, compared with a 17 percent drop in the 1973- 75 recession.

* Bankers Trust Company also sees a drop-off in the second half of the year.

According to Donald Woolley, senior vice-president in charge of economics for Bankers Trust, there is not yet any evidence of a major curtailment in most planned construction. But some cutbacks can be expected in the second half of the year, he says, particularly if the economy were to drop sharply downward.

Herbert Krupp, an energy economist with Bankers Trust, believes oil and gas exploration and development expenditures will be up "significantly" in 1980 -- thanks to higher prices. That expansion, he reckons, will continue through the 1980s.

In the case of electric utilities, some are already "foregoing capital expenditures until 1981," he says.

According to analysts, the unknown factor involves spending programs for retail construction projects that tend to involve large work forces and use large amounts of materials. So far, new projects appear to be continuing forward. But any downturn could be expected to have sharp repercussions on the building trades, which are already in trouble because of the slump in the housing market.

Citibank economists believe that investment in new office and commercial (shopping center) space -- which shot up more than 22 percent last year -- will decline by mid-1980 and stay weak through 1981.

Total nonresidential structures, which also include utilities, farm buildings , hospitals, and schools, will decline about 12 percent through 1981, Citibank says. This contrasts with a sharper tailspin of 21 percent for the 1973-75 recession.

You've read  of  free articles. Subscribe to continue.
QR Code to Tight money hits bonds and capital spending
Read this article in
QR Code to Subscription page
Start your subscription today