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Business Spending Likely in for Long Slump

David Payne, Staff Economist, The Kiplinger Letter

Business investment in new equipment is likely in for a prolonged slump because of the global economic slowdown, and because of uncertainty about the outcome of the U.S.-China trade war. The two leading economies are engaged in a tit-for-tat battle that has each slapping successive rounds of penalties against the other's exports. Global growth is slowing as trade tensions ramp up. Europe's outlook is deteriorating as its exports to China soften, while China itself is experiencing a decline in exports that is putting its economy under strain. Britain continues to grapple with its planned exit from the European Union, which Prime Minister Boris Johnson insists will happen on October 31, with or without a deal in place for handling future trade relations. A no-deal exit will disrupt supply lines between Britain and the EU, potentially wreaking economic damage on both sides if shortages and anticipated logistic snarl-ups materialize.

Another drag on spending is that U.S. aircraft maker Boeing has not yet been able to get its grounded 737 Max aircraft certified as safe to return to service. A return will likely not happen until sometime next year at the earliest.

A scant 2% rise in capital spending is in store this year, before shrinking to 1% growth in 2020. New orders may have already peaked this year, and will be completely flat, if not down, in 2020.

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There was a slight pickup during July for orders of nonmilitary goods excluding aircraft, a category that serves as a proxy for business investment. Unfortunately, the 0.4% rise in orders was more than offset by a 0.7% drop in shipments of finished goods, the steepest monthly decline in nearly three years. Weak shipments indicate that factories are less busy and likely will be operating at lower capacity in the future because order backlogs are being worked through faster.



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