Charles W. Bischoff

English

Research Papers in Economics

CHARLES  W.  BISCHOFF 
Yale University 
Revisions  in  Investment 
Antici4ations 
BY MID- 1970,  IT WAS CLEAR that the year would not be a banner period for 
business investment in plant and equipment. Throughout the year, planned 
expenditure increases, announced in successive reports, became more and 
more modest. The 12 percent rise from 1969 to 1970 foreseen in some pri- 
vate surveys in the fall of 1969, and the 10 percent increase projected in the 
survey released by the Office of Business Economics and the Securities and 
Exchange Commission (OBE-SEC) in March 1970, shrank to 7.8 percent 
in the June survey, and the planned increase was pegged at 6.6 percent in 
the survey released early in September. With the price deflator for fixed 
investment rising at an annual rate of nearly 5 percent during the first half 
of  1970, the prospect at the beginning of the fourth quarter is for very 
little, if any, increase over 1969 in real terms. In fact, the deflated total of 
fixed investment recorded in the national income and product accounts- 
an aggregate conceptually different from that measured by the OBE-SEC 
survey-indicated  that in real terms seasonally adjusted expenditures for 
the first half of 1970 were below the 1969 average. 
The aggregate figures hide a good deal of variation among industries. 
There is a sharp contrast between manufacturing industries, for which a 
year-to-year rise of only 1 percent is foreseen, and all other industries, for 
which an increase of more than  10 percent is projected. Public utilities, 
hard pressed by insufficient capacity, continued in September to project a 
substantial rise of 16.5 percent-$1.9  billion-but  this is slightly less than 
319 320  Charles W. Bischoff 
the amount reported three months earlier. The air transportation industry 
maintained its plans for an increase of more than 20 percent, while the 
already large increase previously reported by communications firms was 
to  be stepped up (this was the only major industry group reporting an 
increase in plans between the June and September surveys). 
On  the  other  side,  in  September, manufacturers of  durable  goods 
planned to invest less in 1970 than they did in 1969, with major downward 
revisions from earlier plans reported by the primary metals, machinery, 
aircraft, and stone, clay, and glass industries. Even in the earlier surveys, 
manufacturers of autos, aircraft, steel, and stone, clay, and glass products 
foresaw year-to-year  decreases. In September,  manufacturers  of nondurable 
goods still projected a small increase, but the plans of producers of food 
and beverages, paper, petroleum, rubber, and miscellaneous nondurable 
goods were revised downward. The railroad industry, which reported plans 
for a large increase in the March survey, in September foresaw no overall 
change from 1969, while the originally planned increase by transportation 
firms other than rail and air was reversed to a large decrease. 
Whether even the modest plans projected for the second half of  1970 
will be realized must be determined by examining the fundamental factors 
discussed in  my  earlier report-growth  of  output,  capacity utilization, 
profits, stock prices, bond yields and credit availability, and the absence 
of the investment tax credit.' In view of these factors, it would not be at 
all surprising if even the scaled-down plans reported by manufacturers 
were not  realized. This conclusion  is  borne  out  especially by  data  on 
capacity utilization in manufacturing, which is reported by the Federal 
Reserve Board to have reached a nine-year low of 78 percent in the second 
quarter. Rather than attempt a detailed exposition  of economic factors 
that would work for or against realization of these projections, I explore 
here the more limited question of whether there are any simple systematic 
regularities in the time series on investment plans two quarters ahead and 
one quarter ahead, and on the realizations themselves, that can be ex- 
ploited to  improve the chances of correct forecasting. For example, can 
anything be inferred about the likelihood that the $32.15 billion annual 
rate of spending projected for manufacturers  in the fourth quarter of 1970 
1. "Plant  and Equipment  Spending  in 1969  and 1970,"  Brookings  Papers  on Economic 
Activity  (1:1970), pp. 127-32. Revisions in Investment Anticipations  321 
will  actually be  realized, from  the  fact  that  expectations two  quarters 
ahead have exceeded realizations for thirteen quarters in a row by amounts 
ranging from $0.45 billion to $2.11 billion?2 
All of the numbers from the OBE-SEC survey have been revised within 
the past year, and they have also been carefully adjusted to eliminate sys- 
tematic biases in survey response. The quarterly projections are adjusted, 
industry by industry, to eliminate biases having to do with (1) seasonality 
(the raw anticipations typically exceed expenditures in the first quarter 
and fall substantially short of expenditures in the fourth quarter); (2) the 
length of the planning horizon (the further ahead the quarter being pro- 
jected the greater the tendency to  underestimate expenditures); and (3) 
the size of firms (large firms tend to  overestimate while small firms tend 
to  underestimate). The methods used insure that, for any given planning 
horizon  and  industry, the  average ratio  (over  the  period  1947-69)  of 
anticipated to realized investment will be unity, and that any statistically 
significant deviations of the ratio from unity that can be associated with 
seasonality or a time trend (linear or quadratic) will be eliminated. Such a 
trend allows for learning as well as changes in the firm-size composition 
of the sample.3 
The corrected anticipations post an impressive forecasting record, espe- 
cially at turning points, but at the same time it is hard to avoid the view 
that something systematic is still being missed, at least for some of the 
manufacturing industries. The previously cited run of thirteen consecutive 
overestimates on two-quarters-ahead expectations occurs in the corrected 
data;  it  is  preceded by  a  string of  fourteen  underestimates in  fifteen 
quarters. Furthermore, there is a run of eighteen consecutive overestimates 
between 1958 and 1962. 
I have studied only the aggregates for all industries, manufacturing, and 
nonmanufacturing. All the regressions cover the longest available sample 
period-from  the first quarter of 1948 through the second quarter of 1970. 
The results are summarized in Tables 1 and 2. The variables used in the 
regressions are defined as follows: 
2. The expectations  published  in September  for the October-December  quarter  are 
considered  to be "two quarters  ahead"  because  they are projected  from actual expendi- 
tures for the April-June  quarter. 
3. The precise methods used are described  in Survey  of Current  Business,  Vol. 50 
(February  1970),  pp. 36-39. 322  Clharles  W. Bischoff 
I =  realized expenditures for the period in question t, 
IA1 =  one-quarter-ahead anticipated expenditures for period 
t, reported in period t-  1, 
IA2 =  two-quarters-ahead anticipated expenditures for period 
t, reported in period t-2, 
I-,, I2,  and I-3 =  realized expenditures in period t-  1, t-2,  and t-3,  re- 
spectively, 
IAl1  =  one-quarter-ahead anticipated expenditures for  period 
t-  1, reported in period t-2. 
In all cases the dependent variables are the differences between realiza- 
tions and anticipations: (I-IA1)  or (I-IA2).  Thus, a positive revision or 
Table 1. Estimates of Errors in Anticipations  of Investment  in Plant and 
Equipment  One Quarter Ahead, First Quarter 1948 to Second 
Quarter 1970a 
Seasonally  adjusted annual rates in billions  of current dollarsb 
All industries  Manufacturing  Nonmanufacturing 
Variables and  Equation  Equation  Equation  Equation  Equation  Equation 
summary statistics  (1)  (2)  (1)  (2)  (1)  (2) 
Constant  0.171  0.162  0.278  0.217  -0.128  -0.122 
(0.221)  (0.219)  (0.134)  (0.118)  (0.166)  (0.166) 
IAI  -0.249  -0.270  -0.114  -0.374  -0.260  -0.336 
(0.084)  (0.075)  (0.102)  (0.071)  (0.080)  (0.093) 
IA2  0.234  ...  0.087  ...  0.255 
(0.084)  (0.102)  (0.080) 
-lI  ..  0.463  ...  0.673  ...  0.412 
(0.121)  (0.120)  (0.131) 
l-2  ...  -0.204  ...  -0.318  ...  -0.072 
(0.073)  (0.073)  (0.088) 
Summary statistics 
R2  0.165  0.224  0.145  0.369  0.110  0.141 
Standard error  0.817  0.792  0.524  0.453  0.590  0.583 
Durbin-Watson 
statistic  1.28  2.30  1.37  2.43  1.88  2.40 
Note:  Here and in Table 2, figures in parentheses  are standard errors of the cocfficient estimates. 
a. The dependent variable is (I -  IAI)  (see  text for  definition of  the variables and tquations).  All 
variables in each equation refer to the indicated industry. 
b.  Corrected  for systematic biases in survey response. Revisions in Investment Anticipations  323 
Table 2.  Estimates of Errors in Anticipations  of Investment  in 
Plant and Equipment  Two Quarters Ahead, First Quarter 1948 to 
Second Quarter 1970a 
Seasonally  adjusted annual rates in billions  of current dollarsb 
All industries  Manu(facturing  Nonmanufacturinig 
Variables and  Equation  Equation  Equation  Equation  Equation  Equation 
summary statistics  (3)  (4)  (3)  (4)  (3)  (4) 
Constant  0.268  0.289  0.395  0.389  -0.229  -0.226 
(0.304)  (0.303)  (0.185)  (0.168)  (0.215)  (0.237) 
IA2  -0.123  0.053  -0.313  -0.118  -0.524  -0.160 
(0.147)  (0.078)  (0.156)  (0.069)  (0.132)  (0.103) 
IAI-1  0.375  ...  0.520  ...  0.675 
(0.200)  (0.231)  (0.170) 
I-2  -0.276  0.149  -0.243  0.570  -0.146  0.198 
(0.106)  (0.152)  (0.119)  (0.144)  (0.126)  (0.168) 
_3  ...  -0.228  ...  -0.491  ...  -0.034 
(0.104)  (0.104)  (0.125) 
Summary statistics 
R  2  0.117  0.130  0.147  0.284  0.171  0.209 
Standard error  1.097  1.089  0.699  0.641  0.757  0.823 
Durbin-Watson 
statistic  1.05  1.27  0.74  1.18  1.37  1.33 
a.  The dependent variable is (I -  IA2)  (see text for definition of the variables and equations). 
b.  Corrected for systematic biases in survey response. 
anticipation error corresponds to an underestimate. The basic hypotheses 
I wished to explore included: 
(a)  That  the  error  in  one-quarter-ahead anticipations  might  be 
highly correlated with the error for the previous quarter; 
(b) That  the  error  in  two-quarters-ahead anticipations  might  be 
highly correlated with previous errors (note, however, that  the latest 
error available when IA2 is published is I2  -  IA2_2); 
(c)  That in an examination of the error in on-equarter-ahead  antici- 
pations, the difference between IA2 and IA1  might carry some informa- 
tion, and that this revision might catch a new trend but not carry it far 
enough quantitatively; and 324  Charles W. Bischoff 
(d) That anticipations might be "regressive," in the sense that some 
constant rate of growth might be expected, so that in periods of higher 
growth the anticipations would regress toward the lower growth rate, 
leading to underestimates (positive errors), and vice versa. 
For hypothesis (a),  a significant serial correlation was found  only for 
manufacturing; the results are not reported because other, more complex 
equations performed better. In the case of  hypothesis (b),  a significant 
correlation between (I -  IA2)  and (I-2  -  IA2_2) was found for all indus- 
tries taken together and manufacturing, but not  for nonmanufacturing. 
Again,  the  result is  not  reported because  other regressions performed 
better. 
Hypothesis (c) is reflected in equation (1), with the results reported in 
Table 1. The coefficients were just the opposite of my expectations. They 
indicate that if IAJ exceeds IA2, the realization is likely to  lie between 
them, except for the effect of the non-zero constant; in general the results 
are unimpressive. 
Hypothesis (d) is reflected in equations (2), (3), and (4), with the results 
reported in Tables 1 and 2. In the case of one-quarter-ahead  expectations, 
the introduction of I-1 and I_2 produced the desired results, with the best 
results for manufacturing. For two-quarters-ahead anticipations, two dif- 
ferent measures of recent growth were tried, IA1_1 and I2,  and I2  and I3. 
Again, the only results inspiring any degree of confidence were for manu- 
facturing, with the best measure apparently the change between I3  and 
I-2. 
This investigation probably cannot be fruitfully carried much further. 
It might be useful to examine the individual industries within manufactur- 
ing to see which, if any, dominate the results. Table 3 sets out the implica- 
tions of equations (1) through (4) for the last half of 1970. Except for the 
manufacturing regression, I have no confidence that anything useful is re- 
vealed.4  Perhaps linear regression over the whole sample period is too dull 
an instrument. 
If there is any trustworthy result from this exercise, it is the indication 
that the reported prospective rebound of manufacturing investment in the 
4. It should be noted that in all the equations  except  (1), the results  are quite  likely to 
be affected  by lagged values of one component  of the dependent  variable  appearing  on 
the right-hand  side of the equation, in conjunction  with serial correlation  of the dis- 
turbances. Revisions in Investment Anticipations  325 
fourth quarter of 1970 is unlikely to occur. I base this conclusion at least as 
much on the unbroken string of overestimates in the two-quarters-ahead 
expectations as on any of the specific numerical results. 
Table 3.  Investment  in Plant and Equipment,  First and Second Quarters 
1970, and Projections for Third and Fourth Quarters 1970 
Seasonally  adjusted  annual  rates in billions of current  dollars 
All  Manu-  Non- 
Quarter  industries  facturing  manufacturing 
Actual  1970:1  78.22  32.44  45.78 
Actual  1970:2  80.22  32.43  47.79 
Expected  1970:3 
Reported  81.05  31.21  49.84 
Projected 
Equation  (1)  80.78  30.82  49.91 
Equation  (2)  80.51  31.27  49.36 
Expected  1970:4 
Reported  82.24  32.15  50.09 
Projected 
Equation  (3)  80.64  29.77  49.91 
Equation  (4)  81.01  31.31  49.75 
Sources: Actual and reported-Survey  of Current  Business, Vol. 50 (September 1970), p. 18; projected- 
equations (1) through (4) (see text). 
Discussion 
THOMAS  JUSTER  NOTED  THAT  realized investment could  fall  short  of 
anticipations as the result of two very different kinds of causes--()  cut- 
backs of demand due to disappointing markets, and (2) supply shortages 
that delayed deliveries, installation, or construction. Both of these will gen- 
erate  observations  of  downward revisions,  but  different variables are 
needed to explain them. 
There was some discussion of how the supply limitations might be de- 
tected in the data. It was noted that if supply factors were preventing in- 
vestors from realizing their plans, that would lead investment plans to be 
pushed into the future. The same thing that made actual investment fall 326  Charles  W. Bi.,vhnff 
below last quarter's anticipations would lead to even higher plans for the 
subsequent quarters. On the  other hand, the  demand-induced cutbacks 
would be likely to be accompanied by weakening of plans for future quar- 
ters. In addition, two possible indicators of supply limitations were sug- 
gested-the  capacity utilization rate of capital goods producers and the 
index of the National Association of Purchasing Management on lead time 
for equipment. 
James Duesenberry and Walter Heller noted that the cost of executing 
capital projects has probably exceeded businessmen's expectations during 
the recent period of inflation. That should have tended to push realized 
outlays above anticipations. Presumably, it has been swamped by other 
factors causing downward revisions of plans. 

Revisions in Investment Anticipations

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