Business Spending Up, but Headwinds Are Building

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

U.S. businesses are reining in investment spending as uncertainty grows about tariffs and a bigger trade war with China. The Trump administration keeps trying to force Beijing to amend its trade practices, which Washington regards as unfair, and may curb high-tech exports to China. China’s economy, second in size only to that of the United States, is already losing steam and is likely to become a less vibrant market for U.S. goods and commodities. The United States is levying tariffs on $250 billion worth of Chinese exports and may tax another $267 billion, covering virtually everything China sends to the U.S. Washington has also imposed 25% tariffs on imported steel and 10% on aluminum from almost everywhere in the world, prompting many countries to respond in kind.

The metals tariffs are taking a toll on U.S. manufacturers’ bottom lines. Farm machinery maker Deere & Co. partly blamed rising steel costs for its price hikes and cost-cutting measures. The effect of President Trump’s tariffs was apparent in the second half of the year. The International Monetary Fund warns that protectionist trade measures are the greatest threat to global economic expansion.

Despite the unease over trade, the U.S. economy is quite strong. We look for a 7% increase in business spending this year, partly to cope with growing worker shortages. National output will slow only modestly, to 2.7% in 2019 from 2.9% this year. Next year’s softer GDP pace will result partly from a waning in the fiscal stimulus applied this year — the $1.5-trillion tax cut. The tax bill included incentives to increase business equipment spending, leading to a significant pickup in 2018 spending. Business organizations now worry that tariffs and a more acrimonious trade war with China will undo those gains.

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Business investment was flat in October in terms of new orders, but shipments of finished products rose. That marked the third straight month that orders for nondefense capital goods, excluding aircraft — a category that is a proxy for business spending — either declined or were flat. Machinery and primary metals orders declined from September, but there was a pickup in orders for computers, networking gear and electrical equipment. Though overall the monthly picture was one of softness in investment, some big manufacturing concerns, such as aircraft makers, have years-long backlogs of orders. And big and small businesses are looking for employees, likely forcing them to update equipment and factories to keep costs under control.

The uncertainty affecting business spending is heightened by speculation over what will replace the tax cut stimulus. And everyone worries that the nine-year economic expansion has grown long in the tooth. For example, some companies that received tax windfalls in 2018 chose to use them for large-scale stock buybacks rather than expansion. Some worry that oil’s steep decline, which began in October, signals weaker global growth, which eventually would take a toll on U.S. growth prospects.

See Also: How to Get Your Small-Business Loan Approved

Sources:

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