Business spending for plant and equipment will continue to expand rapidly even though the rate of overall economic growth will continue to slow, according to a study released today by the Business Council.
Excess production capacity in many industries has disappeared during the economic recovery, and the prospect of continuing economic growth, coupled with tax benefits for business investment in plant and equipment, will lead to a 20 percent increase in investment this year and a 10 percent increase in 1985, the study said.
The Business Council consists of the chief executive officers of nearly 200 major corporations.
This business investment, including the purchase of high-technology equipment, will boost productivity and continue to hold down labor costs, which this year are rising at their slowest rate in a decade, according to the study. The group's forecast for 1984 growth in the gross national product was revised upward, "yet again," demonstrating that the strength of the nation's economic growth exceeded the expectations of business leaders, who now predict 7.2 percent GNP growth, which would be the strongest annual rise in 30 years, the study said. GNP growth next year will be 3.5 percent, according to the study.
"An interesting statistic in the data has to do with inventory accumulation," said John R. Opel, chairman of International Business Machines Corp. "Inventory accumulation and high spending to replenish inventories have not been required, which indicates that American business is learning how to operate and grow without inventory accumulation, and that is good news."
Opel said part of the reason inventory accumulation has dropped is that output has not kept up with sales in some industries such as automobiles, where the business leaders predict U.S. purchases, including imports, of 10.5 million new cars both this year and next year.
Corporate profits, aided by the economic recovery and the slower-than-usual rise in labor costs, will increase by 23 percent this year and 6 percent next year, the study said.
Inflation, measured by the consumer price index, is expected to be 4.3 percent this year and 5 percent next year, according to the study. The study noted that the threat of increased competition from foreign suppliers has forced domestic businesses to keep price increases to these levels. The study calls the decline in the rate of inflation from double digits only three years ago to less than 5 percent "remarkable."
The prime rate, which is the interest that banks charge their most favored clients, is expected to rise to 13 percent by the end of 1984 and to 14.5 percent by the end of next year, from the current level of between 12.5 and 12.75 percent.
The study says that an increase of nearly 7 million jobs over the last two years has brought rapid American business is learning how to operate and grow without inventory accumulation, and that is good news. John R. Opel, Chairman, IBM growth this year of 6 percent in consumer expenditures, which make up two-thirds of GNP. A softening in employment gains next year means consumer spending will rise 2.5 percent in 1985.
Business Council economists believe the rise of the dollar against other major currencies will be halted soon, but not before it contributes to increasing the nation's trade deficit from $100 billion this year to $120 billion in 1985. The study expects a $177 billion federal deficit next year, $10 billion more than the Reagan administration's latest estimate.
IBM's Opel said the study's prediction of a recession in 1986 reflects the belief that, following the current upturn, economic growth will be reversed, as it has in the past.