Business expects little mileage from capital outlays this year
Boston — Capital investment, one of the main engines powering the American economy, sputtered along last year and appears to be out of gas in 1987. With a good many factories sitting idle and foreign companies fighting to keep their hard-won shares of the United States market, economists say it will be 1988 or beyond before American capital goods manufacturers find enough new orders to help refuel a sluggish economy.
This year's investment by business in factory buildings and heavy equipment such as oil derricks, machine tools, bulldozers, and mainframe computers is expected to be even weaker than lackluster 1986.
After inflation is taken into account, capital spending this year will drop 0.8 percent from last year's already low level, predicts Nigel Gault, an economist with Data Resources Inc., a Lexington, Mass., consulting firm.
Mr. Gault does see some relief on the horizon ``by the second half of the year, when the trade sector will be giving an upward kick to the economy.''
At that point, he says, the dollar's decline should finally begin to benefit US manufacturers as ``US products become more competitive because of the sharp price increase for imports.''
But until then, and even beyond this year, it seems that consumer spending on such items as houses, clothing, and cars will have to continue pushing the economy slowly along. Spending by American industry doesn't appear to be much of a factor in that growth. Problem traced
Why this continuing drag by industry on the economy when consumer spending continues to grow?
Some economists blame new federal tax laws that do away with investment tax credits for business and offer less favorable depreciation rules. Lawrence Klein, professor of economics at the University of Pennsylvania's Wharton School, contends that the new tax bill has ``bad features'' that discourage rather than encourage capital formation.
Chronic overcapacity shoulders its share of the blame. With US manufacturers operating at only 80 percent of capacity, it's difficult to justify investing in new capacity, or even greater effiiciency. Caterpillar Tractor of Peoria, Ill., has fought to counter the trend by investing more than $1 billion to modernize its operations. But despite improvements in efficiency, the company has had a tough time. It recently announced the closing of three more of its plants.
Others point fingers at foreign competitors and unfavorable exchange rates that for years have made US-made goods less attractive at home and aboard. But a number of economists cite the burgeoning federal deficit as the root of the exchange rate and trade deficit problems.
``Our shrinking manufacturing sector is a reflection of our borrowing from the rest of the world,'' says Kenneth L. Judd, associate professor of managerial economics at Northwestern University's Kellogg School.
Professor Judd points to the trade deficit and says: ``You can't pay it off by inviting the Japanese to come here and visit McDonald's restaurants. ... You have to export more computers, capital equipment, and grain while importing much less.''
To import less, however, requires a change in expectations. It requires US consumers to switch allegiances to American manufacturers when they've been getting good quality for less money for a long time from imports. Now, with a weaker dollar, economists have been toe-tapping this past year, waiting for a revival in demand for US products - to be followed by a revival in orders for US capital goods. Market shares maintained
But despite the weaker dollar, overseas companies are stubbornly cutting their profit margins or even taking small losses to hold market share gained when the dollar was strong.
``An improvement in the exchange rate front has shown some benefits to such industries as paper and chemicals,'' says Jerry L. Jasinowski, chief economist at the National Association of Manufacturers. ``But US manufacturers are not going to find it as easy to retake market share that they've lost.''
Mr. Jasinowski says low growth or no growth in capital spending during a purported ``growth'' period for the economy is even a bit ominous.
``Given that capital spending normally picks up toward the end of a recovery, I find it disturbing that there was weakness in '86 and a likely decline in 1987,'' Jasinowski says.
For those in the industries most affected, 1987 is both a year to tighten belts and a year to hope the declining dollar will finally make a bigger difference in sales than it has made so far.
``There's no question the pressure is on Japan to raise their prices,'' says Richard Priebe, a spokesman for Cross & Trecker, a Detroit-area machine tool manufacturer.
``Their margins have disappeared and there have been some announced price increases. But those increases haven't shown up at the point of sale because the Japanese still have quite a bit of inventory in this country.''
Cross & Trecker makes milling machines, machining centers, foundry equipment, coal equipment, and an assortment of heavy machine tools. But a good portion of its business is with the automotive industry, which saw a number of plants closed last year.
``We're proceeding on the assumption '87 will be a flat year,'' Mr. Priebe says. ``We'll be bumping along on a kind of plateau - our shipments and revenue will be flat.'' Oasis in defense work sought
Rather than battle the dearth of capital spending head on, some companies have decided it's better to diversify out of the hardest-hit capital goods sectors.
Colt Industries, based in New York, is a diversified company with three lines of business: aerospace/government, automotive, and industrial - including sales to US oil companies. But with capital investment down in two big markets, oil and automotive, there has been a management decision to move out of weaker-selling product lines, such as machine tools, and toward more aerospace/government work.
Such defense-related work acounts for about 34 percent of Colt revenues and will grow in the future, a company spokesman says. In December, for example, Colt sold its Pratt & Whitney Machine Tool division in West Hartford, Conn., and recently got out of specialty steels.
``It's been a conscious management decision to migrate more toward aerospace and government work,'' says John F. Campbell, a company spokesman. ``During the last decade, we've seen a 12-fold increase in revenues from aerospace. ... It's been tough to sell into the oil patch, and we're not expecting an upturn anytime soon.''