ECONOMIC

A number of points may be noted about recent changes in manufacturingplant and equipment outlays. First, 1973's large increase reflects in partthe sharp rise in new starts in 1972 (Table 3). Second, the accelerationof the rise in outlays, as compared to the year before, was most pronouncedin materials-producing industries. Third, the rise in manufacturing outlaysin real terms since 1968 has been far below the previous postwaraverage. For materials-producing industries real outlays rose 1.9 percentper annum from 1968 through 1973, compared to a rise of 2.8 percent perannum from 1948 through 1968 (Table 4).TABLE 4.—Changes in manufacturing real plant and equipment outlays, 1948 to 1973Percent change (annual rate)PeriodMaterialsproducingindustries *All othersmanufacturingindustries1948 to 19681948 to 19531953 to 19571957 to 1965 ....1965 to 19681968 to 1973 22.82 24.72.42.11.94.12.04.35.44.12.41 Consists of primary metals, paper, chemicals, petroleum refining, rubber, textiles, stone, clay, and glass, and lumber.2 Preliminary.Note.—Based on expenditures in plant and equipment survey, deflated by the implicit price deflator for nonresidentialfixed investment.Sources: Department of Commerce (Bureau of Economic Analysis) and Council of Economic Advisers.INVENTORIESInventory investment was quite low in the first 3 quarters of 1973, contraryto the expectations of the Council and of most forecasters. Additions toinventories were only slightly higher in 1973 than in 1972, and gauged bythe postwar ratio of stocks to output, inventories appeared low duringthe year. Two main explanations have been put forth to account for thisbehavior. The first is that businessmen were cautious in their inventorypolicy last year, partly because of their experience during the 1970 recessionand partly because they expected that the rapid upsurge in demand andoutput in late 1972 and early 1973 could not be sustained. A second possibility,to which the Council attaches greater weight, is that the rise indemand was so strong and the limits to raising production so numerousthat businessmen were unable to build up stocks to any significant extentuntil the end of the year.The slowdown of the rise in final sales in the last quarter of the year(a decrease in real terms) was accompanied by a sharp rise in inventoryaccumulation. Much of this reflected the backing up of automobile inventoriesin the hands of dealers, since producers did not make an immediateadjustment to the pronounced decline in sales. Apart from automobiles theincrease in inventory accumulation in real terms was not especially large.52