American businesses plan to boost investment spending by 2.8 percent this year, the Commerce Department said yesterday, but private economists called even this modest increase unlikely given a sluggish economy and rising interest rates.
Weak economic growth and heavy foreign competition forced a 3.1 percent reduction in business capital spending in 1986, the biggest drop since the depths of the 1981-82 recession.
In its latest survey, the government estimated that spending by businesses for expansion and modernization would total $384.6 billion this year, after removing the effects of inflation.
The new survey was completed in May and represents a revision from a March poll that put the increase this year at a lower 1.8 percent.
But private economists said they believe the new figure overstated the strength in investment. They predicted U.S. industry will end up scaling back on current plans as the year progresses in the face of continued sluggish overall economic growth.
Analysts said the survey did not reflect the full impact of a jump in interest rates this spring. Rising rates make it more costly for businesses to finance expansion plans.
"If the government took the same survey today, you would find a lot more pessimism among businessmen because interest rates have gone up so much," said Michael Evans, head of a Washington consulting firm.
Sara Johnson, senior economist at Data Resources Inc. in Lexington, Mass., predicted investment spending would decline by about 0.8 percent this year as benefits from an improving trade performance are offset by other factors.
The new tax law, which went into effect Jan. 1, removed a variety of tax breaks once bestowed on businesses to encourage capital investments.
The rise in interest rates, triggered by growing investor concerns about inflation, has caused some analysts to revise downward their estimates for overall economic growth as measured by the gross national product.
Evans said he believed the GNP would actually decline at an annual rate of 1 percent in the current quarter and post only a sluggish 2 percent growth rate in the second half of the year.
The new survey, taken after businesses had the actual spending totals for the first quarter, showed a giant 4 percent drop in investment spending in the first three months of the year. But businesses boosted expectations for the remainder of 1987, predicting a 5.3 percent increase in the current April-June quarter and gains of 1.5 percent in the third quarter and 1.4 percent in the fourth quarter.
The overall business spending increase for 1987, if realized, would be the first gain since an 8.7 percent advance in 1985. Last year's 3.1 percent decline was the largest since a 7.9 percent plunge in 1982.
Before removing the effects of inflation, the government estimated business investment spending would total $390.9 billion this year, a 3.1 percent increase over 1986.