Slowdown in capital spending spells bad news for 2019 US growth

WASHINGTON • Juiced by US President Donald Trump's tax cuts, business investment helped deliver a robust US economy in the first half of the year, 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 US 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 early this year 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, Whirlpool, Caterpillar and Stanley Black & Decker recently cited higher costs from the trade war.

The strength of capital expenditures - or capex - may be the key to determining whether US growth can continue outpacing peers, how much higher the Federal Reserve can raise interest rates, and whether the US dollar's value will keep rising.

"Capex is the No. 1 story," said Mr David Woo, head of global rates and foreign exchange strategy at Bank of America. "There are hundreds of data points coming out every month but that's the one I watch."

The trade war and likely political gridlock after the midterms pose "the biggest uncertainty for capex and therefore US rates and the US dollar", said Mr Woo, who has analysed the US economy and markets for almost a quarter of a century.


A Ford assembly line in Michigan. There is growing debate over business investment in the US, which encompasses spending on structures such as factories, among others. PHOTO: AGENCE FRANCE-PRESSE

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, when non-residential investment slowed to a crawl last quarter. Orders at US factories for non-military capital goods, excluding aircraft, were weak in October for a third straight month.

Mr Trump and the 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 US$1.5 trillion (S$2 trillion) cost of the new tax law.

While few expect capex to collapse, there is 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, when non-residential investment slowed to a crawl last quarter. Orders at US 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 last month, and regional Fed gauges cooled. The economy is projected to expand at a more moderate pace this quarter and soften further early next year.

On Jan 1, tariffs go up to 25 per cent on US$200 billion of imports from China, a critical player in manufacturing supply chains, and Mr Trump has threatened to impose levies on everything imported from the Asian nation - which would further elevate material costs and worsen supply disruptions.

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, for instance.

But Mr Stephen Stanley, chief economist at Amherst Pierpont Securities, is optimistic, arguing that the recent capital spending weakness reflects "more of a breather than the end of the line" for the tax cut boost.

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A version of this article appeared in the print edition of The Straits Times on November 28, 2018, with the headline 'Slowdown in capital spending spells bad news for 2019 US growth'. Print Edition | Subscribe