USA TODAY International Edition
Tariffs put brakes on business spending
Slowing could be a sign of weakening economy
Nick Penze, CEO of Zerelli Technologies, had a long holiday shopping list for his company.
He wanted the Park City, Utah, designer of industrial seals to acquire a smaller manufacturer and possibly upgrade its factory, and buy new furniture and computers for Zerelli’s headquarters.
But the Trump administration’s 10percent tariff on $200 billion in Chinese imports has reduced both Zerelli’s cash flow and the revenue of its customers – such as makers of washing machines and transmissions. As a result, Penze has put his plans on hold.
“I wouldn’t feel comfortable doing it, not knowing what’s going to happen in the next six months to a year,” Penze says.
President Trump and Republicans in Congress vowed that this year’s big tax cut would unleash a wave of business investment that would juice economic growth. But increases in capital spending for businesses of all sizes slowed dramatically in the third quarter, raising questions about whether any tax-cut benefits are already fading. Some economists say the pullback reflects business worries over the tariffs and likely foreshadows a broader slowdown in the economy.
“It appears that the hard economic data… is finally exhibiting the negative hit to planned capital spending from trade policy,” research firm Morgan Stanley wrote in a recent note to clients.
Increased business spending on new equipment, structures and intellectual property can be a key driver of the economy and jobs. Manufacturers of factory machines, computers and trucks need more workers to make the products while businesses that buy them need more employees to run them.
Yet such business investment edged up at an annual rate of just 0.8 percent in the July-September period, down from 11.5 percent and 8.7 percent in the prior two quarters, and the smallest advance since late 2016, the Commerce Department said last month.
The performance was the biggest weak spot in a report that showed the economy grew at a healthy 3.5 percent rate, following 4.2 percent growth in the second quarter.
The last time capital spending flatlined in late 2016, a downturn in oil prices was still damping investment in drilling. While volatile oil prices also played a role last quarter, business outlays would have been anemic – even without a pullback in the oil industry, says Barclays economist Jonathan Millar.
Joe LaVorgna, chief economist of the Americas for investment bank Natixis, downplayed the soft business spending, noting the figures can be volatile.
“I just don’t get worried over one quarter,” he says.
The increase could be revised higher or it may be a blip, he says, with business investment resuming its robust growth clip in the current quarter.