Business investment was solid in 2018, but policy uncertainty may darken the outlook. We expect business spending to slow in Q2 as business confidence fades from cycle highs. Conflicting factors are clouding the outlook for this sector and make it challenging to determine how adventurous businesses are willing to be with capital spending projects.
Business investment surged in 2017 in the wake of tax reform that slashed the corporate tax rate from 35% to 21%. That boost faded in 2018, and growth of business spending has been less robust than a year ago. Looking ahead, there are multiple reasons why businesses may choose caution over investment.
Critically, the global growth outlook has dimmed. Within the past six months, the Fed has dropped its 2019 GDP forecast from 2.5% to 2.1%. The International Monetary Fund shaved its global growth forecast and the ECB now expects eurozone growth of only 1.1%. Many of the cuts to GDP forecasts were in developed economies, impacting the outlook for S&P 500 companies that can rely heavily on these countries for revenue generation.
Policy is also impacting business spending plans. Trade tensions, particularly the U.S.-China trade dispute, remain an overshadowing uncertainty for large multinationals with international supply and revenue chains.
Businesses have been putting cash to work in other ways, and in 2018 engaged in over $800 billion in stock buybacks.1 Companies have also been retaining cash on their balance sheets, a factor that should partly offset concerns about rising corporate debt levels.
We will be watching monthly core goods shipments as a high-frequency indicator of businesses’ appetite to invest. The risk is that uncertainty rises, causing businesses to retreat into bunker mode. This becomes even more of a risk with some deeper policy disruption, like a full-blown trade war.
1 S&P Dow Jones Indices.
Read the analysis for each indicator:
This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information. All investing is subject to risk, including the possible loss of the money you invest.