In the wake of the news that the capacity utilization rate of U.S. industry hit 84.7% in August, a significant shift in business investment is drawing new attention: After falling 27% from mid-1990 through mid-1993, real outlays for industrial construction have turned up again and are now running about 10% above year-earlier levels (chart).
The pickup in plant expansion is welcome on several counts. For those economists who worry about high industrial operating rates, added capacity promises to defuse inflationary pressures. For those afraid that Fed restraint could short-circuit the upswing, rising plant investment offers assurance that the expansion has entered a self-sustaining phase, with capital spending helping to offset the slack in housing and consumer spending.
Economists Bruce Steinberg of Merrill Lynch & Co. and Steven Roach of Morgan Stanley & Co., for example, both believe that the Federal Reserve is overstating industrial operating rates. Steinberg notes that real outlays for basic industrial equipment are up 15% this year, an increase that in past cycles would have been associated with much stronger capacity growth. And Roach argues that the Fed has failed to appreciate how new technology and reengineering of existing plants have boosted production capability.
In this view, the new stress on plant expansion is more than a response to occasional bottlenecks occurring in a few industries. "Spending for new facilities is long-term investment that reflects confidence in the durability of the expansion and the competitiveness of U.S. industry in world markets," says Jack Lavery of Merrill Lynch.
One measure of how that confidence is growing comes from Cimtek Inc., a market-research and database company in Johnson City, Tenn., that keeps tabs on new industrial projects around the country. According to Cimtek's tally, plans to build some 1,066 plants were unveiled in the first half of this year, 69% more than in the first half of 1993. And planned plant expansions were up 60%, to 772.
In sum, business is finally putting the "plant" back into U.S. plant and equipment expenditures. With a little luck, that should help dampen inflation, keep the economic upswing on track, and position U.S. industry to capitalize on the global expansion that lies ahead.