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BusinessWeek: January 11, 1993 |
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Business Outlook
THIS RECOVERY WILL BE BORNE ON THE BROAD SHOULDERS OF BUSINESS Since the recession's end, now officially designated as March, 1991, investment has been a driving force behind what growth the economy has been able to manage. The main thrust is coming from outlays for new equipment. Investment in new construction continues to languish, as the glut of offices and other commercial buildings dwindles grudgingly. Since the first quarter of 1991, spending on new equipment has accounted for 25% of the growth in real gross domestic product--even though equipment spending is only 8% of gdp. Given the efforts by business to improve productivity and cut labor costs, it's not surprising that investment in computers and other information processing equipment makes up the lion's share of that contribution. The cost, though, is slow job growth. The motivation for this substitution of capital for labor seems clear: With interest rates the lowest in decades and with the cost of employee benefits still rising rapidly, capital looks increasingly cheap relative to labor. That's particularly true as prices of computers and other high-tech gear continue to fall. FACTORIES FORESEE BIG JUMPS IN OUTLAYS Looking ahead, the capital budgets of corporations are especially aggressive through the first half of 1993 (chart). That's the reading from the Commerce Dept.'s latest survey of capital-spending plans. The responses date from October and November and offer the first glimpse of anticipated outlays in the new year. For all of 1993, businesses plan a 5.3% increase in spending for plant and equipment. But after figuring in an expected 2.1% drop in capital-goods prices, mainly reflecting the fall in computer prices, real outlays are slated to rise by 7.6%. That would follow an expected 5.4% advance for 1992. If realized, the 1993 increase would be the largest in four years. There is every reason to believe business will stick by its plans--if not beef them up. A retroactive investment tax credit, applied incrementally to new capital spending, and a tax break for capital gains targeted toward small or new enterprises are two incentives likely to emerge from the Clinton Administration. Also, the rise in corporate profits that began in 1992 seems to have staying power, particularly as the economy keeps improving (page 56). Fourth-quarter GDP will likely show a healthy combination of strong consumer-led demand and declining inventories. Although lower inventories probably held back overall growth, last quarter's spending surge suggests that earnings were solid. The biggest turnaround in 1993 capital spending, according to Commerce's survey, will be in manufacturing. After a 5.1% decline in outlays in both 1991 and 1992, factories now intend to lift spending on plant and equipment by 5.2%, before adjustment for inflation. Nondurable-goods industries, such as food processing, textiles, chemicals, and paper, lead the way, with planned increases ranging from 8% to 11% for next year. The improving near-term outlook for manufacturing tends to justify those plans. Although orders for durable goods dipped by 1.9% in November, they had jumped 4.6% in October. The quarterly pattern of orders shows the recent uptrend (chart). Moreover, shipments of nondefense capital goods jumped 3.2% in November, a sign that capital spending remains on an upward path. Some of the best news on capital spending lies outside manufacturing, though. Services, such as transportation, utilities, and retailing, plan a 5.4% increase in outlays in 1993, but that comes after an even stronger 8.2% advance in 1992. Services appear to be leading the charge in efforts to boost productivity. EXPORT GAINS CAN'T STAY SO ROSY The push from business investment is particularly well-timed for the economy. That's because spending elsewhere, especially by foreigners and U.S. consumers, isn't likely to maintain its recent robust pace. Recessions abroad are hurting U.S. exports. And while Christmas was a retail success, the urge to play Santa has left many consumers with empty wallets and low savings. Exports weren't ailing in October, however. They jumped 3.4%, to a record high of $39.2 billion, while imports slipped 0.5%, to $46.2 billion. As a result, the merchandise trade balance narrowed sharply, to $7 billion in October, down from $8.6 billion in September. But strong export growth probably won't continue into the new year. Export orders for October delivery were taken months ago. Conditions in the industrialized nations have deteriorated since then. Developing nations will take up some slack in 1993, but the recessions across Europe and in Japan will cut deeply into demand. CONSUMERS SHOPPED. NOW, THEY MAY DROP Meanwhile, business can expect only subdued growth in demand here at home. In particular, consumers will play a secondary role in the 1993 economy, behind business investment. One reason: Uncertainties about job growth, plus the tax and credit-card bills from 1992, raise questions about first-quarter consumer spending. Last quarter, consumers shopped till they dropped. Purchases of goods and services jumped 0.5%, or a sturdy 0.3% after adjusting for prices. Real outlays surged 0.6% in October. The November gains were widespread, and early reports for December suggest a further gain last month as well. A lift in consumer spirits accompanied the buying spree. The Conference Board reports that its index of consumer confidence surged 13 points in December, to 78.3. That follows an 11-point jump in November (chart). The bulk of both gains came from brighter expectations for the next six months. Consumers' assessment of present conditions, however, has improved little. In particular, households remain downbeat about current job availability, but their optimism over future job prospects rose sharply. A more upbeat assessment of the economy's future helped shoppers give retailers the best Christmas since 1988 (page 29). In addition to holiday gifts, consumers also bought items too big to put under the tree. Sales of existing homes advanced 5.8% in November, to an annual rate of 3.85 million, the highest in nearly six years. Car buying was also healthy, with sales at a 6.2 million pace in the middle of December. And sales of domestically made light trucks soared to a 5.3 million annual rate. The problem for 1993 is that the splurge has not been matched by a similar gain in incomes. Personal income rose just 0.2% in November, despite a strong 0.7% advance in wages and salaries. After taxes and inflation, real disposable earnings fell 0.1% in November. The growth in real aftertax income has lagged behind buying for two quarters now. In the fourth quarter alone, real spending is on track to rise between 4% and 5%, at an annual rate, while income is setting a 3% pace. Consumers are likely to rein in their buying until their incomes can catch up. Moreover, households are ignoring their nest eggs. Over the past three months, savings as a percentage of aftertax income has dipped to 4.4%, the lowest rate since 1990 (chart). Households will have to cut down on spending in order to replenish their savings next year. The expected pullback by consumers means business will have to lend a hand to keep the recovery going. A decade of investment in machine tools, computers, and heavy equipment may not be as glamourous as the consumption of the 1980s. But the increases in capital stock, productivity, and living standards will offer much more to the economy's long-term vitality than the borrow-and-spend extravagance of the 1980s ever did. | |
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