Business Spending Forecast

Economic Forecasts

Trade Tensions Weigh on Business Spending

Kiplinger’s latest forecast on business equipment spending

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Businesses are keeping a tight grip on investment spending in the face of the most severe trade dispute in decades. The Trump administration hiked tariffs on $200 billion of imports from China to 25% at the beginning of June, and now threatens levies on another $300 billion of Chinese goods if Washington and Beijing can’t come to terms on a trade deal. Global trade flows are starting to suffer as the world’s two largest economies escalate their tariff battle, leaving the rest of the world to await some clarity about the outcome. U.S. sales to China of agricultural commodities like soybeans have suffered a major blow already, and there are indications that the widening trade conflict is beginning to affect industrial sectors, as well. The export-reliant U.S. manufacturing sector is losing momentum, in significant part because business at aircraft maker Boeing has stalled while it tries to get its grounded 737 Max aircraft certified as safe to return to service.

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A slim 5% rise in 2019 capital spending is in store, down from last year’s 6% gain. That is a small annual gain compared with past decades, when double-digit increases in capital spending were relatively common. But U.S. manufacturers are currently experiencing headwinds at home and abroad, some of which should ease later in the year. Boeing received no new orders for aircraft in June, for example, so that hurts its exports and is a cautionary sign for its own factories and for those of its suppliers. Boeing is working on software fixes for its 737 Max airliner, which was involved in two fatal crashes. The airplane is grounded worldwide now. But if Boeing can get regulators’ OK to fly again relatively soon, that would be a boost to production and deliveries, and would give a lift to capital spending.

Adding to investment caution, the broader global economy is weakening. The European Union, a major market for U.S.-made goods, is under strain as key economies like Germany deal with a slowdown in its exports to China and elsewhere. It also remains unclear when or even if Britain will quit the European Union, as it voted to do in mid-2016. The current deadline for reaching a deal on exit terms is October 31. But Britain’s ruling Conservative Party is in the process of electing a new leader to replace Prime Minister Theresa May. The leading contenders support leaving the EU, with or without a deal to govern future trade between the U.K. and the EU. If Britain leaves with no trade arrangements in place, disruptions to existing supply lines will be greater, and the potential for shortages and economic damages will increase for both sides.

U.S. and Chinese trade officials are still talking, which means there is at least a chance for a deal on trade or a truce on additional tariffs. Discussions are scheduled between Trump and Chinese President Xi Jinping, but there are fundamental differences between the two sides. The United States says it wants a comprehensive trade agreement that makes China accept enforceable standards for respecting U.S. copyrights and intellectual property, among other measures. Beijing counters that the United States is trying to thwart its economic development. The Trump administration takes the view that it is dealing from a position of strength, because the U.S. economy is growing solidly, and it has shown some signs of flexibility in its international dealings. For example, it pulled back on a threat to impose a new round of tariffs on Mexican imports after Mexico agreed to toughen its curbs on migrant flows through its territory. Administration officials are now trying to persuade the U.S. Congress to ratify a renegotiated North American free-trade pact with Canada and Mexico. Democrats want changes to its labor and environmental provisions. Meanwhile, the Trump administration has lifted tariffs on steel and aluminum imports from Canada and Mexico, each of which ended their retaliatory penalties on American products.

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Business-equipment spending held up relatively well in May. A key measure of investment intentions — orders for nondefense capital goods excluding aircraft — grew by 0.4%, after a 1% decline in April. Even more encouraging, shipments of finished goods posted a 0.7% increase, up from a 0.4% rise in April. So far this year, shipments of finished goods are up 3.8% compared with the same period last year. Shipments of capital goods are significant because they are used to calculate equipment spending in the government’s GDP measure. Orders strengthened in May for machinery, computers and electronic products, a sign that factories are not fully retrenching while they await the outcome of tariff battles and slower overseas growth. That is encouraging, but the orders pipeline is weak, so factory activity is likely to continue at a soft pace until some resolution to the trade disputes with China arrives.


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