On Jan. 1, tariffs go up to 25 percent on $200 billion of imports from China, a critical player in manufacturing supply chains, and Trump has threatened to impose levies on everything imported from the Asian nation -- which would further elevate materials costs and worsen supply disruptions.
“I don’t count business investment as down and out,” said Ellen Zentner, chief U.S. economist at Morgan Stanley. “But there are a lot of uncertainties about next year,” so the expansion “could slow more than anyone is expecting.”
The escalation in tariffs could set off a chain of negative events, including reduced forecasts from companies and a hit to margins, she said. The biggest unknown is whether investors sour on the growth story and cause financial conditions to tighten.
The latest ISM manufacturing survey showed more than 40 percent of the comments from respondents in recent months were related to tariffs, with trade uncertainty continuing to push companies to evaluate whether to invest or adopt a wait-and-see approach, or even consider expansion outside the U.S.
Recent market jitters reflect concern about trade. A business-investment slowdown also would have implications for the economy’s long-term speed limit and inflation.
Without investment growth at an adequate pace, productivity is likely to stay mired in the rut of the past decade. That means less room for wage gains, which have been the missing piece of the strengthening job market throughout this expansion.
Stephen Stanley, chief economist at Amherst Pierpont Securities LLC, is optimistic, arguing the recent capital-spending weakness reflects “more of a breather than the end of the line” for the tax-cut boost. He said investment should stay elevated and the impact may pay off over several years with higher productivity.
For now, the question is whether demand is steady enough to encourage executives to increase investments in buildings, machines and software.
“The biggest tax levied by Washington is the uncertainty tax,” said David Kelly, chief global strategist at JPMorgan Asset Management. “You need a capex boom going on now if you are going to get a meaningful impact on the capital-labor ratio and therefore productivity. And we don’t see that right now. And uncertainty related to trade has a lot to do with this.”
This article provided by Bloomberg News.