Growing Spending On Plant, Equipment Sets Stage for Growth

GROWTH was slow and uncertain over the past six months. Even so, the United States economy is moving to higher ground.

Next week, the Commerce Department will release its advance estimate for gross domestic product in the second quarter and revised data for the prior three years. Government insiders say growth in the first half of 1992 was at a rate of about 2 percent.

The stage is set for an acceleration in growth. Monetary policy continues to be extraordinarily easy. Total bank reserves - the raw material for the money supply - rose at a rate of 19 percent from third quarter 1991 through second quarter 1992. Jobs (a good proxy for overall activity) respond to changes in Federal Reserve policy with a lag of about one year. On this criterion, faster expansion is just ahead.

The modest acceleration in business volume during the past six months led to exceptional gains in corporate profits. The rate of increase in pretax profits from current operations in the January-March period was roughly 20 times the rise in GDP. Business cannot maintain such outlandish spreads between sales and profit. Even so, similar gains should be a feature of the investment landscape through most of 1993.

Rigorous cost-cutting has lowered the break-even point of American industry. Cash flow from current operations will help trigger a boom in business investment in equipment. New orders for plant and equipment have confirmed the Commerce Department's survey of capital- spending plans.

Real contracts and orders for new plant and equipment (the best leading indicator of business investment) totaled a near-record $134 billion in the three months ended May. That was a 16.7 percent increase (annualized) from the comparable period ending six months earlier in November 1991.

Over time, such outlays will help to lower costs further, thus sparking gains in profitability. The investment boom would be still stronger were candidates Bush and Clinton to agree to break the deadlock over an investment tax credit and/or a cut in capital- gains taxes.

US exports have cooled considerably in recent months. In current dollars, the US merchandise trade deficit (a notoriously volatile number) was $7.4 billion in May, the highest since November 1990. However, more than half of the May merchandise deficit was offset by a surplus in service trade of about $4 billion. Reporters spilled gallons of ink on the deficit; they did not report the surplus. Moreover, in real terms the deficit averaged $6.2 billion per month in the three months ending in May, 16 percent

lower than the current dollar figure.

The trade deficit has deepened in recent months because of persistent strength in imports. Real imports have gone up at an annual rate of almost 12 percent since April 1991. This pattern is typical of a period of economic recovery.

Since 1986, real US exports have risen at an annual rate of more than 10 percent. Exclusive of oil - more a matter of geology than economics - US merchandise trade is close to balancing. The modest non-oil deficit is offset by the surplus in trade in services.

Washington has again revised downward its measure of net foreign investment in the US - the so-called US foreign debt. The Commerce Department now says the market value of American assets overseas totaled $2.1 trillion in 1991. Foreign assets here were $2.5 trillion, a "debt" of $400 billion. On a comparable basis, net investment in the US in 1989 was $159 billion. The Commerce Department also says that most of the increase in foreign investment here in the last two years was due to the fact that stock a nd bond markets in the US were stronger than those in other countries in 1991. The actual net inflow of foreign capital in 1991 was only $4.8 billion, down sharply from the peak of $168 billion in 1987. This indicates basic gains in the nation's international balance sheet. It suggests a basis for strong growth.