BUSINESS INVESTMENT IN A SLUMP
As consumers open their wallets and help dig the economy out of a funk, businesses are still pinching pennies. Capital spending fell 6.2% at an annual rate in the first quarter following a 2.1% drop late last year, its worst such stretch since 2009 and a big reason the economy nearly stalled in that period, Commerce Department data show. Recent reports signal little relief in the short term. Orders for capital goods excluding aircraft and defense — a proxy for business investment — declined 0.8% in April. Business outlays proved sluggish throughout 2015, rising 2.8% compared with an average 4.5% clip in the 7-year-old recovery. That, however, was largely chalked up to a pullback by energy companies amid the plunge in oil prices.
But the investment slump has widened in recent months across an array of sectors, says Howard Silverblatt, senior analyst for S&P Dow Jones Indices.
Ford cut first-quarter spending 20% from a year ago to $1.5 billion. Target and entertainment giant 21st Century Fox slashed outlays in half to $273 million and $156 million, respectively.
Business spending typically makes up 12.5% of economic activity but has an outsized impact. Equipment and software purchases and new construction create thousands of factory jobs. David Bianco, Deutsche Bank’s chief U.S. equity strategist, expects S&P 500 sales to rise 3% to 4% this year vs. 6% if investment were healthy.
A big reason for the recent skid is the financial market turbulence early this year that drove down stock prices and raised corporate borrowing costs, economist Mark Zandi of
Moody’s Analytics says. Markets have recovered, but firms are slow to rein in investment and hiring so there’s a lag.
Political uncertainty in an election year also looms large, leaving in limbo critical issues such as the corporate tax rate, Diane Swonk of DS Economics says.
Randy Bradley, who owns a Burger King franchise in Ottumwa, Iowa, has rejected the company’s pleas to spend $400,000 to remodel the outlet. He says sales are down and employee health care costs are up. The election is also a factor.
“I’m looking at two very different scenarios,” he says, adding he thinks Donald Trump would be more business-friendly than Hillary Clinton.
Daktronics, the top supplier of big-screen video displays, cut spending to $17 million in the first quarter from $22 million a year ago. CEO Reece Kurtenbach told analysts last week the election and Federal Reserve interest-rate policy were among the headwinds creating uncertainty.
A longer-standing drag has been a dearth of new technology to boost productivity, Bianco says. And companies have little reason to invest in labor-saving technology with wage growth tepid, Swonk says. Orders for computers and related equipment were down 17% in the first four months of 2016 from a year ago.
A quick rebound may be unlikely. The National Association of Business Economics’ new survey predicts flat investment in 2016. And the National Federation of Independent Business expects its May survey, due next week, to show fewer small businesses planning capital outlays.
But wage gains are picking up, giving firms a reason to splurge on technology after the election, Swonk says. Meanwhile, rising oil and other commodity prices should juice factory machine purchases, Wells Fargo investment strategist James Paulsen says.