The Outlook: Capital Spending Will Boost Recovery
NEW YORK -- This is a recovery that may need all the help it can muster. The economy as a whole has been expanding for a year, but mostly at a snail's pace and far more slowly than is normal in the early stages of a business-cycle upswing. The unemployment rate hangs stubbornly above 7%, higher than when the recovery began. And new-home starts, a rare bright spot during most of 1991 and early this year, fell sharply in April.</br></br>Help is clearly needed, but is any on the way? Perhaps. A likely source, as important as it is unexciting: capital spending.</br></br>Such outlays, typically for new plant and equipment, tend to lag behind the economy as a whole. The Commerce Department, in fact, classifies plant-and-equipment spending, adjusted for inflation, as a lagging economic indicator at points in the business cycle when, as now, the economy is emerging from a slump. Such spending invariably fell, for example, in the early months of four other recoveries since 1969.</br></br>This pattern has occurred again in the current recovery. In last year's second quarter, as the recovery was just beginning to take hold, plant-and-equipment spending fell to an annual rate of some $487 billion, in terms of the 1987 dollar's buying power; this was $9 billion less than in the previous quarter. But more recently an impressive climb has taken place: The spending level recently moved above $525 billion.</br></br>Further substantial increases seem probable. Most forecasters look for the recovery to persist and broaden in coming months. In the process, businesses will need to expand their facilities appreciably. Indeed, the task could become urgent if the recovery should prove unexpectedly brisk. After much restructuring and many plant closings, manufacturers already are using nearly 80% of their capacity.