In conclusion, I believe that our problems of capital formation and capital investment are the direct result of sweeping changes which have taken place in the past five years in the relation of Government to the private sector.

As Congress has closed one so-called "loophole" after another, it has destroyed one capital and investment incentive after another. The legislative uncertainty grows and grows, and in growing it delays the capital investments so desperately needed.

The U.S. Government needs to replace uncertainty with certainty and to create incentives to growth by restoring the capital and investment incentives to taxpayers who now have virtually none. As the "loopholes" have been eliminated, so has the risk-taking, the creation of new capital, the drive to grow.

APPENDIX A

APPENDIX B-1 THROUGH B-3

RINFRET ASSOCIATES, INC.

Short-term Business Study "Resurvey-Capital Expenditures" March 15, 1977 1. On January 31, 1977 we began our resurvey of 1977 capital expenditure plans of private industry. We did the first survey of 1977 capital expenditure plans of private industry in the Fall of 1976 so that this survey is a follow-up of that one. Not only is it a follow-up but it is an update as well.

At this writing we have responses from firms representing about 41 percent of all private capital expenditures in 1976. We will obtain more responses but the current level of responses approaches the significant level. The results we present in this Study are meaningful results but they will change somewhat as more responses come in. The changes, however, are not likely to materially or significantly alter the results we present here. Herewith the results of this resurvey.

2. Comparison.-In the following tabulation we compare the percentage changes in 1977 capital expenditures as originally indicated by private industry in the Fall of 1976 and as indicated currently (for the Fall of 1976 see our short term business study subtitled 1977 Capital Expenditures dated October 18, 1976). We use the percentage change figures only because there have been changes in the 1976 base figures of the U.S. Department of Commerce.

Point number one.-Industry has raised upwards rather materially capital expenditure plans for 1977.

In the following tabulation we compare the actual dollar figures for capital expenditures in 1976 as reported by the U.S. Department of Commerce in the Fall of 1976 and as reported currently:

Point number two.-Industry fell short of its plans as late as the Fall of 1976 for the year 1976. There has been, in recent years, a tendency for industry to undershoot, to fall short of, its capital expenditure plans. Put that another way: industry tends to plan more than it actually spends. This raises an interesting question: are capital expenditure plans hypersensitive to the state of the business cycle?

Why do we make this point? For the reason that almost everyone tends to forget: capital expenditure plans are not fixed in concrete (no pun intended), they change and are modified. The outlook for capital expenditures in 1977 is better at the moment than it has been but if history is any guide, the year could end up at lesser gains than those now being indicated. That's not pessimism, it's

just looking at the way the facts have tended to go in the past few years. Nevertheless, a better plus now than last Fall: That's good and pleasant.

3. Real Capital Expenditures.-In 1976 we innovated the idea of asking our respondents to indicate how much they thought capital expenditure prices would increase in the coming year. That permitted us to talk about real changes in capital spending in 1976 rather than to talk about just the nominal changes. This year we again asked industry to indicate how much capital goods prices would rise, i.e. indicate how much 1977 capital goods prices would increase. In the following tabulation we compare increases in capital goods prices for 1976 with those projected for 1977.

Industry does not expect, for all practical purposes, the rate of inflation in capital goods to change in 1977 as compared with 1976.

Here, then, are the figures for real capital goods expenditures in 1977 as compared with 1976. The 1976 figures are the most recent estimates. The 1977 figures are, obviously, the results of our survey:

In 1976 the real volume of private capital expenditures declined about one percent. This meant that capital goods put in place added nothing to the growth of the economy in 1976.

In 1977 current plans by private industry call for an increase of about 7 percent in real capital expenditures. Capital goods will add to the economic expansion in 1977 and are coming through just when they are needed.

The figures for the details in “All Industries" are not nearly as reliable as the aggregate and should be used cautiously and with circumspection, but it seems fair to say that durable goods expenditures are going to increase materially in 1977.

As Gabriel Heatter used to say, "There's good news tonight" and these figures are good news.

APPENDIX D-1

RINFRET ASSOCIATES, INC., INTRAOFFICE MEMORANDUM, JUNE 9, 1977

To: Pierre A. Rinfret.

From: Barry Molefsky.

Re Capacity Utilization.

1. Final results of RAI's April 1977 Capacity Utilization Survey are now available. This survey was conducted between May 2, 1977 and June 6, 1977. Responses were received from corporations with roughly $400 billion in total assets, representing 56 percent of the survey sample. This level of response is somewhat higher than normal.

2. Operating rates for the manufacturing sector as a whole in April 1977 rose to the second-highest level ever recorded in the history of RAI's survey. For the most part this rise was due to an extraordinarily large increase in the motor vehicle industry's capacity utilization.

Automakers report that in April 1977 they were operating at 116 percent of potential. This is 20 percentage points above the January 1977 rate and 22 points above the year-earlier rate. The Federal Reserve Board reports that output of motor vehicles and parts expanded at a compound annual rate of 35.2 percent between January and April 1977. Capacity pressures evident in RAI'S survey make it unlikely that production can increase further. In all probability, output will decline in coming months.

The iron and steel and stone, clay and glass industries also recorded sharp increases in operating rates between January and April 1977. The rise in stone, clay and glass utilization represents a snapback from depressed activity due to natural gas shortages this winter. The increase in iron and steel operating rates from 67 percent in January to 84 percent in April is also due in part to a recovery from weather-induced shutdowns. But strong activity in the industry's customer markets probably accounts for a larger part of this gain. Auto, appliance and business equipment production have all recorded strong gains in recent months. The iron and steel utilization rate reported in RAI's survey is virtually identical with the capability utilization rate reported by the American Iron and Steel Institute (AISI). The AISI series has been increasing since April and reached 89 percent in the last week of May 1977. Rising demand for steel products has permitted manufacturers to increase prices. Between January and April 1977 the Wholesale Price Index for iron and steel has risen at an annual rate of 7.3 percent.

The nonferrous metals industry recorded a relatively minor increase in capacity utilization to stand at 89 percent in April. This is slightly below the recent peak rate of 92 percent recorded in October 1976.