A Realistic Lack of Confidence

TIME'S Board of Economists finds many reasons for executive worry

With production heading higher, unemployment dropping and profits climbing, businessmen by all rights ought to be bullish. Quite the opposite: last week brought two new signs that they are still deeply worried. The stock market, that sometimes distorted mirror of investment hopes and fears, tumbled 22 points, as measured by the Dow Jones industrial average, to a 34-month low of 753. And a McGraw-Hill poll of executives in eleven industrial countries found U.S. businessmen second from the bottom in confidence about the future. Only profit-pinched Belgian managers were more apprehensive.

What is it that so worries American business leaders—and keeps them from committing their companies' money to job-creating research, development and plant-expansion projects? Members of TIME'S Board of Economists, who gathered in Manhattan last week, found the answer in a whole series of concerns—about persistent inflation, rising interest rates, the widespread expectation of an economic slowdown late this year or in 1979, the threats of energy shortages and increasing Government regulation. Their rather chilling conclusion: strongly as the economy is performing now, the longer-term risks are genuine and serious enough to justify the executives' considerable caution.

Says Alan Greenspan, who was chairman of President Ford's Council of Eco nomic Advisers: "There seems to be some belief that you can exorcise this state of business mind by mass psychotherapy. But you can't because the attitudes are not irrational. When you are uncertain about the environment for investment, then you will not commit your money, just as someone will not run in the middle of the street blindfolded." Otto Eckstein, head of Data Resources Inc., a Boston-based, computerized economic-forecasting firm, thinks that executives' caution should not even be described as "lack of confidence," but rather as "business realism."

The caution is potentially damaging. Adjusted for inflation, business spending on new plant and equipment is expected to rise only about 4.5% this year, v. the 7% increase the Administration calculates is necessary to keep the economy expanding. One reason: what Greenspan calls the "hurdle rates" for new investment have risen by two percentage points in the past decade. In other words, a company that once would have built a new plant or installed labor-saving machinery if it could expect, say, a 10% annual profit on investment, will not go ahead now unless it can foresee a 12% return.

Equally ominous, spending on research and development has fallen from 2% of gross national product in the mid-1960s to 1.5% today, partly because research projects often will not yield a return until well into what businessmen see as an uncertain future. Both the rise in hurdle rates and the decline in R. and D. indicate that the hired managers who run corporations today are more fearful of taking risks than the venturesome owner-managers of old.