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ARE WE HEADED FOR A CAPITAL SHORTAGE? by Dr. WILLIAM C. FREUND, Vice President and Chief Economist, The New York Stock Exchange Given the gradual pace of recovery, today's economic news has tended to alleviate our worries about the adequacy of capital investment. However, unless serious attention is given to the problems of capital formation in the economy, today's " g o o d " economic news may be replaced not too far down the road by news of renewed inflation, reduced rates of economic growth, and insufficient new jobs for our growing labor force. To be sure, the near-term business outlook is encouraging. The economic recovery is showing considerable internal energy. The momentum of expansion is solid, and well-founded. And few economists doubt the upturn will last more than a year, despite recent slowdowns. Is The Present Recovery Sound? Consumer outlays have spearheaded the economic recovery. Automobile sales promise to total close to 10 million in 1976, with imports down and domestic output up. Retail sales are also holding up, and consumer confidence is likely to receive another shot in the arm with a tax cut early this year. Moreover, recent moderation in consumer spending encourages the belief that the expansion will avoid excesses, thereby prolonging its duration. In the meantime, retail, wholesale, and manufacturing inventories have had to be replenished in order to keep pace with sales, while the inventory sales ratio shows a need for greater production to maintain adequate supplies. The housing sector has not only turned up, but is beginning to show considerable vigor. It seems reasonable to expect that total new housing starts in 1976 will reach well over 1.5 million. Inflation should hover around 6 percent for the beginning of this calendar year. Although the GNP price deflator came in just under 4 percent during the first quarter of 1976, this low rate will probably not be repeated soon. One reason is that the decline in wholesale food prices of a year ago is not likely to continue; the consumer price index also indicates a 6 percent inflation rate. Interest rates, short-term, may move upward in early 1977, as bank loans rise to finance increased short-term demands and as the Federal Reserve System tries to maintain an even-keel posture. Long-term rates will probably not show any marked increase. The reason for moderate long-term credit demands by the corporate sector is that profits are expected to rise 25 to 30 percent in 1976, and perhaps another 10 to 15 percent in 1977. Retained earnings will thus provide financial resources which would otherwise have to be supplied externally. Of course, any serious heating up of inflation will be reflected in long-term interest rates, but this development is not anticipated for the coming year. New plant and equipment spending is sluggish compared to the relatively optimistic trends in consumer spending, inventory accumulation, housing, inflation, and interest rates. While capital investments typically lag behind business cycle turns, the lag is generally no more than six months. The economy is now more than a year beyond the low point of the recession, however, and capital spending has yet to show a marked improvement. According to a Commerce Department survey taken in April and May, business planned to spend $121.03 billion on plant and equipment in 1976. While this is a 7.3 percent gain over 1975, it represents only an 0.8 percent rise in "real" capital spending after stripping away the effects of inflation. This is considerably below the increases in real growth that hovered around 5 percent following the recession periods of 1957-58 and 1960-61, and around 2 percent following the recessions of 1953-54 and 1970-71. This apparent stagnation in real business spending is disconcerting to economists, since 1976 was expected to be a "boom" year for capital goods industries. While a further rise in capital investment is expected in 1977, a prolonged sluggishness in investment activity could dampen prospects for a sustained recovery over the next few years. Indeed, unless capital spending rises more vigorously, bottlenecks and selected shortages will begin to appear, thus intensifying inflationary pressures. What are America's Capital Needs? While the near-term economic outlook is bullish, there are growing fears among a number of economists concerning the long-run growth of the economy. Will there be, for example, major capital shortages in the decade ahead— similar to the credit crunches of 1966 and 1969 and the extreme capital stringency in 1973-74? To corporate financial officers, those periods of capital shortage were not an abstract economic projection. Only the biggest and best-rated firms were able to obtain funds 6
Are we headed for a capital shortage?
Freund, William C.
|Abstract||Illustration not included in Web version|
Tempo, Vol. 23, no. 1 (1977), p. 06-09
|Source||Originally published by: Touche Ross, & Co.|
|Rights||Copyright and permission to republish held by: Deloitte|
|Format||PDF page image with corrected OCR scanned at 400 dpi|
|Collection||Deloitte Digital Collection|
|Digital Publisher||University of Mississippi Library. Accounting Collection|