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Source: Macrobond.

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.


Source: Macrobond.

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:

Growth downshifts from sprint to sustainable

Consumer confidence
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Business investment

A perfect storm of policy uncertainty

Policy uncertainty

Smooth sailing for high yield, headwinds for equities

Equities
Fixed income

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