It was a long time coming, but America's capital spending binge is finally starting to pay off big in terms of rapid growth of productive capacity. According to the Federal Reserve, manufacturing capacity is currently expanding at a 4.3% annual rate--the fastest pace recorded since the late 1960s. The latest reading marks a sea change from the Fed's previous estimates of capacity growth, which clocked in at 3% last year and averaged only about 2% a year from 1987 through 1993.
The pickup is no surprise to Bruce Steinberg of Merrill Lynch & Co., who has long argued that the Federal Reserve has been lowballing capacity growth and overestimating operating rates because it has failed to appreciate the full impact of technology investment on productive capability. "The Fed is finally recognizing that capacity expansion is on a fast track," he says.
The acceleration in capacity growth is underscored by the added investment dollars that began flowing into physical plant last year. The F.W. Dodge Div. of McGraw-Hill Inc. reports that industrial-building startups in 1994 were up 23% in square footage and 20% in dollars, and square footage this year is running 50% over year-earlier levels. The big spenders on plant include producers of metals, paper, chemicals, and capital goods--"a broad range of industries," says a spokesman.
The upshot should be a relatively benign inflation outlook. With more new capacity coming onstream this year, and slowing industrial production, Merrill Lynch's Steinberg expects bottlenecks to dissipate, price pressures to abate, and factory operating rates to edge lower. "If manufacturing capacity maintains a 4%-plus annual growth rate," he adds, "it may even be possible for the economy itself to grow faster than 21/2% a year without generating higher inflation."