Business Spending Slumps as Trade Tensions Rise

• GDP
• Unemployment
• Interest Rates
• Inflation
• Business Spending
• Energy
• Housing
• Retail Sales
• Trade Deficit

Businesses are scaling back spending on new equipment as uncertainty mounts about the outcome of the U.S.-China trade war. The two leading economies are engaged in a tit-for-tat battle that has each slapping successive rounds of penalties against the other’s exports. Global growth is slowing as trade tensions ramp up, a further drag on investment plans. In the latest escalation, President Trump says he will raise the existing 25% tariff rate on $250 billion of Chinese goods to 30% on October 1. Additionally, tariffs on another $300 billion of Chinese goods, which start on September 1 for some products and December 15 for others, will now be at a rate of 15% instead of the original 10%. Overseas sales of U.S. agricultural products like soybeans have virtually dried up as China has turned to Brazil and other suppliers. And the export-reliant U.S. manufacturing sector is losing momentum, partly because aircraft maker Boeing has not yet been able to get its grounded 737 Max aircraft certified as safe to return to service.

A scant 2% rise in capital spending is in store this year, before shrinking to 1% growth in 2020. Until recently, there was reason to hope for a second-half pickup that might lift spending this year to the 5% growth range, but that no longer seems likely as the United States and China continue to impose penalties on one another that dim chances for a trade agreement — or even a cease-fire. Business spending in 2018 was up 6%, a figure that now looks robust by comparison, though it was modest by standards of recent decades, when double-digit annual increases were common. Surveys show factory business in several major regions weakening at the start of the third quarter, implying a looming falloff in shipments of finished goods that is likely to keep investment constrained in coming months.

A global slowdown in economic activity weighs heavily on companies’ investment plans. Europe’s outlook is deteriorating as its export markets in China soften, while China itself is experiencing a decline in exports that is putting its economy under strain. Britain continues to grapple with its planned exit from the European Union, which Prime Minister Boris Johnson insists will happen on October 31 with or without a deal in place for handling future trade relations. A no-deal exit will disrupt supply lines between Britain and the EU, potentially wreaking economic damage on both sides if shortages and logistic snarls occur as anticipated.

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There was a slight pickup during July for orders of nonmilitary goods excluding aircraft, a category that serves as a proxy for business investment. Unfortunately, the 0.4% orders rise was more than offset by a 0.7% drop in shipments of finished goods, the steepest monthly decline in nearly three years. Weak shipments indicate that factories are less busy and likely will be operating at lower capacity in future because order backlogs are being worked through faster.

A potential wild card for investment spending is whether talks between the United States and China can get back on track. Trump suggests that is possible, but Beijing has not publicly committed to returning to the bargaining table. Some differences between the two sides are fundamental, particularly Washington’s insistence that China crack down on theft of U.S. intellectual property and allow easier access for U.S. companies to its markets. Still, a deal, or even a trade cease-fire, would reduce tensions throughout the global economy. Meanwhile, the Trump administration is trying to get Congress to approve a renegotiated free-trade pact between the United States, Mexico and Canada that was concluded late last year. The agreement, known as USMCA, has been ratified by legislatures in Mexico and Canada, but congressional Democrats want changes to its labor and environmental provisions before giving their assent.

Sources:

• Census Bureau, Durable Goods Report
• Census Bureau, Business Inventories