Juiced by President Donald Trump’s tax cuts, business investment helped deliver a robust U.S. economy in the first half of 2018, but signs have multiplied that the growth driver is faltering.
Companies face tariff-related uncertainty, cooling global demand and rising borrowing costs, while plunging oil prices are menacing the energy sector. Meanwhile, the U.S. and China are settling in for a protracted trade war, the boost from lower taxes is projected to fade next year and a politically divided Congress will probably shirk from additional stimulus.
These challenges will test corporate America’s appetite to invest in the kind of faster-growth, higher-productivity future the Trump administration has promised. While such spending picked up in early 2018 after plodding along for years, a string of weak reports raises questions about the outlook. With firms using tax savings for buybacks and dividends rather than investment, the best gains may already be over.
Cummins Inc., Whirlpool Corp., Caterpillar Inc. and Stanley Black & Decker Inc. recently cited higher costs from the trade war. The strength of capital expenditures -- or capex -- may be the key to determining whether U.S. growth can continue outpacing peers, how much higher the Federal Reserve can raise interest rates, and whether the dollar’s value will keep rising.
“Capex is the No. 1 story,” said David Woo, head of global rates and foreign exchange strategy at Bank of America Corp. “There are hundreds of data points coming out every month but that’s the one that I watch,” and bond traders should too.
The trade war and likely political gridlock after the midterm elections pose “the biggest uncertainty for capex and therefore U.S. rates and the U.S. dollar,” said Woo, who’s analyzed the economy and markets for almost a quarter century.
Trump and Republicans sold the corporate tax cut and full and immediate expensing -- which gives companies an immediate tax break for investing -- as a way to rev up the economy and pay for the $1.5 trillion cost of the new tax law.
While few expect capex to collapse, there’s a growing debate over business investment, which encompasses spending on equipment, on structures such as factories and offices, and on intellectual property and software.
Before the recent plunge in oil prices, the energy-sector rebound helped pump up capex and manufacturing. Then, deregulation and corporate tax cuts added a sugar high, until recently: Nonresidential investment slowed to a crawl last quarter. White House economic adviser Larry Kudlow acknowledged as much, but said last week business spending is booming again.
Yet orders at U.S. factories for non-military capital goods, excluding aircraft, were weak in October for a third straight month. The Institute for Supply Management’s manufacturing index fell to a six-month low in October, and regional Fed gauges cooled. The economy is projected to expand at a more moderate pace this quarter and soften further in early 2019.