Newspaper article THE JOURNAL RECORD

Investing Billions in New Capacity Painful for Chemical Industry/manufacturers Cautious about Capital Expenditures

Newspaper article THE JOURNAL RECORD

Investing Billions in New Capacity Painful for Chemical Industry/manufacturers Cautious about Capital Expenditures

Article excerpt

NEW YORK - The Exxon Corp.'s petrochemicals business is enjoying good times. Profits are rising, demand is brisk and most of its plants are operating nearly flat out.

In days gone by, Exxon would have almost automatically built a new plant or two so that impatient customers would not be tempted to take their orders elsewhere.

No more. Instead of expansion, Exxon is squeezing additional production from existing facilities through small and inexpensive steps such as installing pipes with wider diameters, reducing maintenance downtime and teaching staff to operate high-tech equipment more efficiently.

Investing billions of dollars in new capacity on the basis of forecasts of significant growth ``has proven to be a terribly painful experience'' for the chemical industry, said Kenneth N. Robertson, a vice president of Exxon Chemical, whose overcapacity forced it to sell one plant and close another in 1985.

If Exxon is more cautious about capital investment, so are many other manufacturers. In industries ranging from autos to electric utilities to appliances, there is a reluctance to build factories or replace the equipment used in production.

That reluctance, if it persists - and there is strong evidence that it will - could hobble the economy for years. Capital spending has been a powerful engine of economic growth in the postwar years, and the stimulus it can provide is especially needed now. With so much concern that the other engine, consumer spending, is cooling off, capital spending or the lack of it could determine whether the economy continues to grow or slides into recession.

Many economists and business executives are convinced that the years of robust capital investment are over for a while. ``Long term, the trend is slowly down, not up,'' said Irwin Kellner, chief economist at Manufacturers Hanover Bank. Even Paul A. Samuelson, the Nobel laureate in economics who considers himself an optimist on capital spending, does not look for a rapid expansion. ``I do not see a collapse,'' Samuelson said, ``but I don't see a new era either. In fact, I'm quite surprised that we are doing as well as we are.''

Capital spending climbed a hefty 17 percent in 1984 and another 9 percent in 1985 as the nation worked its way out of a recession. That provided a mighty contribution to growth early in the current recovery.

This spending surge, however, followed a two-year period of decline. And the recovery was short-lived: Last year, capital spending fell by 3.1 percent in inflation-adjusted dollars, and the Commerce Department, in a survey of capital spending plans released last week, forecast a rise of only 1.8 percent for this year.

While spending is increasing in paper, textiles, and food, some big guns of capital investment - auto, steel, computer and utility companies, for example - are shrinking their outlays, and the oil industry has no plans to increase spending significantly.

Most forecasts see capital spending increasing again in 1988. After next year, however, it is expected to subside. Neither the Commerce Department nor such private forecasting services as Wharton Econometrics and McGraw-Hill's Data Resources Inc. hold out hope that capital investment will grow at more than a 4 percent average annual rate before the mid-1990s.

That would keep it just ahead of the expected annual increase in the gross national product - hardly the stimulant that spending has been in the past, when it climbed at two or three times the rate of economic expansion. …

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