Capital expenditures (capex) have grown solidly over the past two years, thanks to a rebound from an oil-related slowdown and a historic fiscal stimulus package. Recently, however, trade tensions have started to hinder the promising improvement in business spending.
As shown in LPL’s Chart of the Day, new orders for nondefense capital goods (excluding aircraft), our best proxy for future capex, increased 4.8% year over year in October. Last month’s growth rebounded from a disappointing September, in which new orders slowed the most in 18 months, even as S&P 500 Index companies posted double-digit profit growth last quarter.
The few signs of deterioration we’ve seen recently in economic data have been in indicators of corporate and manufacturing health, convincing us that cooling capex growth is from corporations and producers turning more cautious amid trade uncertainty.
“Even though recent data on business spending have been discouraging, we see trade tensions as the primary roadblock,” said LPL Chief Investment Strategist John Lynch. “The trade dispute has been difficult to navigate for U.S. corporations, and many have opted to put future investments on hold until there is more clarity on the tangible and intangible effects of tariffs.”
We see several signs that this capex slowdown may be temporary, and that another surge could be brewing. Companies remain optimistic, leading us to think the U.S. economy is in the early stages of a larger capex surge. As of October, the Institute of Supply Management reported that about 30% of firms expect to increase capex over the next three months, the highest percentage of the business cycle, while general small business optimism is still near a cycle high. We also think it’s feasible that companies are still planning for capital projects. Fiscal stimulus was implemented only 11 months ago, and major spending would require at least several months of consideration.
Once U.S. businesses have clarity on trade, they may be able to focus more on boosting growth and productivity, which may fuel the next leg of the U.S. economic expansion.
For more of our thoughts on capex, check out this week’s Weekly Economic Commentary: The Current State of Capex.
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