Surge in Capital Spending

Even before the tax reduction, U.S. industry had plenty of money to spend for expansion and modernization--and good reason to spend it. Now, figuring that the cut will stimulate consumer demand, managers in companies as diverse as Allied Chemical, General Electric and Rockwell Manufacturing are re-evaluating their capital investment plans and reconsidering some projects once considered marginal. Whatever U.S. industry may add as a result of the tax reduction will improve what is already almost certain to become the best year ever for capital spending. In 1964 the oil industry plans to expand its capital budgets by 8%, the chemical industry by 11%, the paper manufacturers by 30%, and both the steelmakers and the automakers by 48% .

Profitable Incentive. Corporations will not collect the full benefit of the $2.4 billion drop in corporate taxes for a few years,* but the cut is only one of the factors encouraging them to spend. Profits after taxes have risen from $21.8 billion in 1961 to $27.2 billion in 1963. There has been an even sharper increase in the amount of cash in corporate coffers, since companies are writing off more income in the form of depreciation expenses under the liberalized depreciation rules passed in 1962. At the same time, rising orders for basic materials, industrial machines and other durable goods have pushed production beyond 85% of rated capacity, which is the point at which manufacturers generally decide to expand. Even in industries that have not reached that point--steel, for example, is operating at 75%--the pressure of competition is forcing businessmen to modernize and automate.

Such investments in productivity have actually been reducing the number of jobs in steel and some other industries, but many companies are expanding in a way that will create employment. A Chrysler assembly plant soon to be built in Belvidere, III., will employ up to 5,000, and General Motors' new plant at Fremont, Calif., has places for 4,100. These projects will mean new orders and more jobs in such industries as machine tools, building equipment, office equipment, steel, glass and paint. To the delight of construction contractors, some firms are also brushing up their corporate images and increasing the comforts of their employees by investing in attractive new headquarters, such as Michigan Consolidated Gas Co.'s $20 million structure, designed by Architect Minoru Yamasaki.

The Bullish Force. In his television address to the nation, President Johnson passed along a prediction by a little-known Wall Street economist, Pierre Renfret, that business spending would grow by 20% this year--though he neglected to mention that Renfret meant only spending by manufacturing companies, expects overall spending to rise just 12%. That is still a pretty tall order, but one that the economy may well be able to fill in 1964.

Government economists expect capital budgets to grow by 8% to 10%, moving into the $42 billion area, but many private economists forecast that the final figure will be higher. Rising even 8%, capital spending would expand faster than either consumer spending, Government outlays, or exports--and thus become the most buoyant force in the U.S. economy in 1964.

*Because of a complicated speedup in the method of paying taxes. Large firms pay quarterly, have been making their first payment for the year in September. Under the new law, the first full quarterly payment will be pushed back in easy stages to April. The Internal Revenue Service will accomplish this by having corporations pay a bit more than their usual taxes every year through 1969.

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