The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

Chart 68

A Capital Spending Myth

Everyone knows big business is more interested in continuing its merger-and-acquisition binge than building basic plants; it's spending much less than it used to—right? This is another of the many myths the media perpetrate on us. Actually, business has been pushing harder than ever before to build plants.

This chart of 1900 through 1960 shows spending for business plant and equipment as a percentage of privately produced GNP (the part of GNP other than the government's portion). At a glance, you'll see that for 60 years, except during the Great Depression and World War II, business never spent more than 10 percent nor less than 7 percent of nongovernmental GNP on increasing its productive base through capital spending. So, this chart gives a long-term benchmark against which we can compare present activity.

Capital spending in 1985 was $476 billion—up from $163 billion 10 years ago. Adjusted for 7.5 percent annual inflation during the decade, that $163 billion would turn it into about $337 billion in 1980 dollars. So, the $476 billion really is an inflation-adjusted increase of about 3.5 percent per year, which is more than the economy's real growth.

But the real test is to compare capital spending against this 60-year chart. If business spends more now in relation to GNP than during the average of those heyday years, then we know business is now spending plenty. According to the U.S. budget, nongovernmental GNP is about $2.9 trillion, of which ...