While capital spending so far has been the major disappointment of this country's nearly three-year-old economic recovery, there are indications that outlays by business in 1973 could significantly exceed the currently meager expectations of an increase in real terms of only 3 to 5 per cent.
Some economists believe that capital spending by the second half of the year could gain at an 8 to 9 per cent annual rate - not a boom but a needed spark-plug for the U.S. economy at a mature stage in the rebound when consumer spending may finally be faltering.
Though spending by business on plant and equlpment represents less than 10 per cent of the country's gross national product - in 1977 it totaled about $137 billion - failure by business to expand vigorously during a recovery reduces the potential for productivity gains and further threatens future inflation if rising demand bumps up again inadequate manufacturin capacity.
The Carter administration has also been banking on brisk business expansion at a minimum 9 per cent real growth rate to help meet its goals of a balanced budget and less than 5 per cent unemployment by 1981.
Economists say that much of this year's capital spending outlook will depend on the final shape and speed of passage of President Carter's $25 billion tax plan which is expected to include about $7 billion in business tax cuts and increased investment tax credits.
Passage early in the year could show up in a steadily accelerating pace of business spending in the second half of 1978 and carrying into 1979 as available plans for new plant construction move off the drawing board more rapidly, spurred by the tax reduction.
However, parallel concern is expressed that attempts by the Carter Administration to tie the tax cuts to reform proposals like the reduction of the business lunch deduction could bog down the legislation in a protracted lobbying battle, possibly delaying the effective date and creating uncertainty about the ultimate form of the tax changes as the congressional debate moves closer to the fall elections.
Another factor that could dampen the increasingly optimistic projections for capital spending this year is what happens to interest rates for corporate borrowers. Many forecasts put bond rates for AAA credits at about 9 per cent by the end of 1978, up a full percentage point, with a similar rise for the commercial bank prime lending rate.
If the climb should come sooner or move higher than expected, this could dissuade some companies from going ahead with projects. A sinking stock market and another dismal year for equity financing wouldn't help either.
And if the U.S. economic recovery started looking anemic and recessionary in the second half, businesses will also be more reluctant to expand. But corporations have largely repaired their balance sheets since 1975 and their internal cash flow is also good as a result of steady profit gains. The banks also remain liquid, particularly the big New York money center banks. And a tax cut would only supplement already available funds.
"At the moment there is no real difficulty financing," said Alan Sinai, economist with Data Resources Inc. "The corporate sector remains in a strong capital position, so they can finance a decided increase in plant and equipment spending without creating problems for themselves. Tax cuts to business will not only stimulate but also help to finance part of that increased investment."
Besides taxes, other uncertainties also confront business - particularly in the area of energy. And any resolution of the deadlock over national energy policy should also help stimulate capital spending commitments.
"if the level of uncertainty in the economy could be reduced significantly, capital spending would be likely to accelerate rather markedly," according to an analysis by Townsend-Greenspan & Co., the business consulting firm.
The report assumes only a modest improvement in the level of business confidence after the buffeting of 1977, which in turn should translate into a pickup in capital spending by the second half of this year.
When all is said and done, capital spending in 1977, though not as robust as in past recoveries, increased by more than 8 per cent in real terms and nearly 16 per cent when inflation is taken into account. That is the highest gain since 1966.
And in the third quarter, seasonally adjusted starts on new capital projects by manufacturing companies and public utilities were exceptionally strong, jumping nearly 60 per cent ahead of the second quarter. While a few large utility projects accounted for much of this increase, starts by manufacturers climbed by nearly 30 per cent in the third quarter and were up over 50 per cent from the same quarter in 1976.
Businesses have remained extremely cautious in this recovery when it comes to either inventory accumulation or plant expansion. That has provided a steady but low-grade boost for the economy, with the burden falling on the consumer to keep things really perking.
But if growth continues and the outlined tax breaks come in on schedule, 1978 may be theyyear when business spending plays its traditional role of sustaining the economic expansion.