Corporate Caution

One of the Administration's prime hopes was that a surge of consumer buying would ignite spending by businessmen and lead to prosperity in 1972. Yet, while shoppers have been spending fairly well for months, businessmen continue to keep a tight grip on their money. Since sustained economic growth is all but impossible without a burst of corporate spending for inventories, modernization and plant expansion, the timid attitude is impeding a stronger, faster recovery. Why are businessmen not spending more--and when will they open up?

Caution, confusion and cynicism are perfectly natural from the businessmen's viewpoint. They have too often been disappointed by premature forecasts of prosperity by Washington's erstwhile prophets of boom. "I'm prepared to be optimistic, but I think there is a significant credibility gap between the economic forecasts and reality," says Colt Industries President David Margolis.

Remembering that large inventories collected dust in warehouses after the economy slid in 1970, businessmen are particularly chary about stockpiling more materials and supplies. The inventory-to-sales ratio for manufacturing and trade--that is, the stockpile of goods relative to one month's sales at current rates--dropped to a thin 1.53 in November v. 1.56 the month before and 1.66 in November 1970.

Inventories are not expected to hit exuberant levels for some time because of lingering caution. Beyond that, computers have helped corporations more finely to mesh their purchases of supplies with their production needs. Says Otto Eckstein, a member of TIME'S Board of Economists: "Inventory growth will be relatively low for the year--about $6 billion, compared with the $11 billion growth that would be normal when coming out of a recession." President Nixon, in his Economic Report to Congress last week, projected inventory accumulations of $8 billion for the year and a moderate 8% rise in consumer spending.

Foreign Edge. Business plans a 9% to 10% increase in plant and equipment spending this year--way up from the 2.2% rise in 1971, but still not a boom. Much of the capital spending boost is in electric utilities and telephone facilities, and will be merely keeping pace with growing consumer demand. In manufacturing, which more accurately reflects the business mood, the rise is barely perceptible.

So far, the new investment tax credit has done little to spur capital spending, largely because many U.S. plants are still operating well below capacity. Still, long-term penny pinching on private capital improvements has caused American producers to lose ground to their foreign rivals. By most measures, they spend greater shares of their gross national products on machinery and equipment than the U.S. does.

If the economy continues to improve, the prospects for more business spending are reasonably bright--but not until May or June. Before opening their checkbooks, businessmen seem to be waiting for reports of another strong showing in the first quarter of this year to match last year's final three months.

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