All through 1976, economists kept waiting for a smart pickup in capital spending to serve as the third stage in the United States economy's recovery rocket and to prolong the expansion.
But while consumer buying and business inventory building ignited early in the year, capital spending refused to take off on schedule, and businessmen seemed to exhibit an extra degree of caution in making expansion plans compared with their behavior in other postwar recoveries. Reasons given ranged from a lack of confidency in a Jimmy Carter presidency to a simple lack of customers demand as industrial operating rates remained slack.
Through the third quarter of last year, actual spending by businesses on bricks, mortar and machinery had fallen below projections for six consecutive quarters, where the past experience during recoveries found capital outlays almost always outpacing advance spending plans rather than the other way around.
As 1977 begins, analysts still are focusing on capital spending as the key to a sustained noninflationary economic expansion, but they are divided on the outlook.
Estimates for real volume increases in spending on plant and equipment this year range from as little as 2 per cent to as much as 10 per cent. This would come on top of a tepid 1976 increase of only about 3 or 4 per cent.
A growing number of economists say a new momentum in capital spending began last November with a surge in machine tool orders, and they predict will carry into the new year.
Others, including the Department of Commerce, foresee no pickup until the second half of 1977 or even some time in 1978.
As a result, opinion also is divided over whether some special stimulus is needed to prod business expansion now - like an increase in the investment tax credit or faster depreciation write-offs for industry which are both being considered by the incoming Carter administration - or whether to leave well enough alone and let capital spending fall naturally into place as the entire economy picks up steam and demand heats up.
Proponents of special stimulation are mainly businessmen such as General Electric Co. chairman Reginald Jones who argued recently that businesses "must start to spend right now if they are going to have the capacity on line" before a growing economy runs into production shortages and the danger of renewed inflationary pressures.
By Jones' calculations, a U.S. economy growing at a 5.5 per cent rate in real dollar terms will face such an overheated condition by the third quarter of 1978 unless substantial new capacity is added.
And William L. Wearly, chairman of Ingersoll-Rand Co., one of the country's biggest capital goods suppliers, said in a yearend assessment that increased capital investment is "the keystone to building a sound economic structure," but saw no broad-based upturn at this time because of a lack of business confidence in what policies the new administration in Washington would pursue.
He therefore urged President-elect Carter to enact a wide range of incentives for business spending, including an increase in the investment tax credit, a special tax credit for eliminating plant and equipment over 25 years old, write-offs for new plant and equipment in five years, and restoration of all tax incentives under the old Domestic International Sales Corp. (DISC) program to promote exports.
By contrast, Albert M. Wojnilower, senior vice president and economist with the First Boston Corp., a major investment banking firm, called these kinds of recommendations "a form of special pleading for business." He said the investment tax credit in particular was "a very inefficient way to promote investment," and that in his view the best way to get capital spending moving "is through general economic stimulation."
Wojnilower said that to stimulate capital spending in the absence of increased demand would be imprudent and that "the market is signalling very clearly that there isn't the demand there for the rapid expansion of productive capacity."
A. Gary Shilling, a senior vice president and economist with White, Weld & Co., another investment banking house, said he saw nothing worrisome in the current level of capital spending and said he thought the government "ought to keep its cotton-picking hands off."
He noted that, starting from a low base, capital spending in the first three quarters of 1976 had been advancing between 8 and 10 per cent over each previous quarter in real dollar terms, which was "more than twice as fast as the growth in total final sales" in the economy, and that the fourth-quarter increase would be close to 7 per cent. A comparison between all of 1976 and all of 1975 will only show a gain of 4 per cent in capital spending in volume, but Shilling predicted the 1977 increase will be about 7 per cent.
The White Weld economist said capital spending might disappoint some economists who looked for this to be an eocnomic expansion in line with other postwar recoveries, "which it obviously isn't."
Reaction to the virulent inflation and the steep recession of the recent period as well as the political turmoil of the last decade has made businessmen more cautious in their spending plans, according to Shilling. He cited this as a plus because in his view it will lay the groundwork for a more sustained economic advance.
And he added that his estimates did not show capacity shortages developing in the U.S. economy until well into the 1980s "unless they really hit the escalator in Washington."
In its most recent survey of business investment plans, the Commerce Department predicted only a slight increase in capital spending for the first half of 1977, but added that, after adjusting for 4 per cent inflation, "The first half of 1977 would show virtually no change from the second half of 1976."
The department estimated that capital spending for all of 1976 will total $121.2 billion, up 7.5 per cent over the year before but only about 3 per cent after inflation is subtracted.
McGraw-Hill Publications Co., which conducts its own survey, projects a 13 per cent increase in capital spending in 1977 to $139.6 billion, with about 6 per cent of the gain in real dollar terms, after adjustment for a gain in real dollar terms, after adjustment for a 7 per cent rate of inflation.
A more recent survey by McGraw-Hill showed an 8 per cent increase in the value of orders for nonelectrical machinery in November, nearly matching the largest gain of the year. "The continuing advance in the value of machinery ordering suggests that capital spending may be relatively strong in 1977," according to the company.
Douglas Greenwald, McGraw-Hill's vice president for ecomomics, said that despite the more favorable outlook, he favors some kind of stimulus to further boost capital spending by business. But because of the long lead times involved in getting these projects going, he predicted "nothing much is going to change in the outlook for 1977. What will change, however, is the psychology."
As to the preferred form of the stimulus, Greenwald said that either an increase in the investment tax credit or an overall reduction in business taxes would have a meaningful impact, but indicated that if the measures were only temporary, like those proposed by Carter's economic advisers, they would lose a substantial part of their punch.
"The problem is that most corporations make long-term decisions based on fixed ratios, and if you increase the investment tax credit but don't make it permanent, I don't know how most business would react to the notion that it would be coming off in a couple of years," he said. "But if you cut the corporate tax rate by a couple of percentage points and hold that for a long period of time, that would be more meaningful over a longer period," Greenwald added.