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Businesses Plan to Increase Capital Spending by 11.9 Percent This Year

June 9, 1988

WASHINGTON (AP) _ U.S. businesses plan to increase capital spending by 11.9 percent this year, after only a 1.7 percent increase in 1987, the government said today.

The Commerce Department said a survey completed in May showed that American companies plan to spend $435.2 billion, adjusted for inflation, on modernization and expansion, up from $388.83 billion last year.

If realized, it would be the biggest gain in plant and equipment spending since 1984, when spending shot up 16.6 percent as the current business expansion was just picking up steam.

The new estimate represents a revision from a previous survey completed in March which had put the gain for 1988 at 8.0 percent.

Economists have been expecting a capital spending boom this year as businesses gear up to meet demand overseas for U.S. goods. Export sales have increased because the devalued dollar makes American products comparatively less costly in other countries.

In 1986, investment spending fell by 2.6 percent as American manufacturers battled stiff foreign competition.

For 1988, manufacturing firms expected to boost spending by 12.9 percent. Manufacturers of durable goods, ″big ticket″ items expected to last three or more years, expect to boost capital spending by 11.6 percent, while manufacturers of non-durable products expect a 14.2 percent increase.

Non-manufacturing firms projected an 11.3 percent increase, while transportation firms predicted a 10.1 percent rise, mining companies a 5.6 percent increase and utilities a 3.2 percent gain.

Analysts caution that businesses can quickly scale back expansion plans if the economy weakens. After the stock market crash, capital spending plans were far more modest, but business owners became more optimistic as it became clear the economy was still growing.

The new concern among some analysts is that rising interest rates, because they make expansion projects more expensive, may take the edge off the capital spending boom.

The new survey, taken after businesses had the actual spending totals for the first quarter, showed a 1.0 percent increase in investment spending during the first three months of this year, following a 3.8 percent increase in the last three months of 1988.

Expectations for the rest of the year are for a giant 4.8 percent rise during the current quarter, a 2.2 percent increase in the third quarter and a 1.8 percent gain in the fourth quarter.

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