Corporate caution boosts recession risk

American business is holding back on investment, and that’s holding back the economy.

After growing 5.9% last year, such corporate outlays — including for equipment, software, commercial buildings, factories and mines — have downshifted, laying economic growth prospects clearly at the feet of consumers. Household spending, which accounts for almost 70% of gross domestic product, didn’t skip a beat in the second quarter and is poised for another solid showing in the third.

Nonresidential investment, on the other hand, has slowed abruptly — falling an annualized 0.6% in the second quarter, the weakest performance in three years, after a 4.4% gain in the prior period.

With profitability moderating, global economies grasping for growth and the negative repercussions from antagonistic trade policies, companies have precious little appetite to ramp up expenditures on facilities and equipment.

That’s part of the reason Federal Reserve policymakers are forecast to cut interest rates today for a second-straight meeting. The central bank’s past two statements in June and July described business investment as “soft,” and spending may be poised to sag again in the third quarter. The New York Fed’s latest survey of manufacturers in the state, released Monday, showed the outlook for capital spending plunged by the most in three years.

Economists surveyed by Bloomberg in September see a 35% chance of recession in the next 12 months.

While business investment makes up about 15% of GDP, small potatoes compared with households, consecutive quarterly declines are rare “outside of recessions or shortly after recessions,” JPMorgan Chase & Co. chief U.S. economist Michael Feroli said in a recent report.

“Profitability — defined as the rate of return on invested capital — has decreased in recent years,” Feroli wrote. “This likely has been a headwind to capex. Another more commonly-cited challenge for business investment is trade policy-related uncertainty, through it is harder to find a clear empirical link between trade policy and capital spending.”