Why Technology Is Becoming A Double Edged Sword For Small Businesses

The U.S. economy bolted ahead in the first year and a half of Donald Trump’s presidency on the promise of big tax cuts that fueled a surge in business investment, but now it’s time to wonder if the gravy train is slowing.

Companies pumped more money into software, equipment, buildings, drilling rigs and the like from early 2017 until midsummer.

One key measure of investment known as “core orders” surged to a yearly rate of 13% in Trump’s first year in office after being mostly negative from 2014 to 2016.

Yet new investment —what economists call capital spending, or “capex” — almost dried up in the third quarter. And the fourth quarter has gotten off to a weak start.

Business investment is one of the three main drivers of the U.S. economy, along with consumer spending and government outlays. If companies cut back, the economy is almost sure to slow.

A broader survey conducted by the National Association for Business Economists predicts capex will decelerate to 4.4% in 2019 from an estimated 6.7% this year.

“Persistent weakness could spell concern for 2019 growth,” said economist Andrew Hollenhorst of Citi Research.

Trade tensions and tariffs

Why the sudden shift?

A recent survey of America’s top CEOs points to the ongoing trade fight with China and punishing U.S. tariffs on foreign goods such as steel.

Trade tensions have created uncertainty in executive suites and diverted money that could have been used for investment to pay for the higher cost of key supplies. Two-thirds of the corporate chieftains who took part in the survey said capex could suffer in late 2018 and early 2019.

Some companies such as famed motorcycle maker Harley Davidson HOG, >-3.35%  even contend the tariffs forced them to move manufacturing operations to other countries where costs are lower and their customer base is growing.

Another headwind is a recent rise in U.S. interest rates that make it more expensive for businesses to take out loans.

Even though U.S. rates are still very low historically, senior economist Sal Guatieri of BMO Capital Markets says it appears consumers and businesses are still as sensitive as ever to rising interest rates. Not only has capex slowed, so have home sales and applications for new mortgages.

Read: Mortgage rates slide the fastest in 4 years, but it may be too late for housing market

The Federal Reserve has taken note. Top central bankers now suggest they might not raise rates much further. President Trump has also taken to blasting the Fed and Chairman Jay Powell, blaming higher rates for the recent plunge in the stock market DJIA, >+0.14% SPX, >+0.18%

Other worries for big business include a weaker global economy and a stronger dollar DXY, >+0.58%  . Europe is forecast to grow less than 2% in 2019, the U.K. and Japan even less.

That’s likely to constrain U.S. exports, push American firms to buy cheaper supplies from other countries or induce them to invest more overseas where costs are lower.

Loss of “energy?’

Even the sudden drop in oil prices is a double-edge sword.

The savings are great for consumers and allow them to buy other goods and services, but it also means U.S. energy companies might retrench. The energy industry has been one of biggest sources of U.S. business investment.

The last time oil prices sank from mid 2014 to early 2016, energy investment fell and the U.S. economy suffered. The drop this time around is not as big, but lower prices are still likely to pinch.

“Fourth quarter capex appears set to disappoint, and that was even before the impact of the drop in oil prices hits the mining sector data,” said chief economist Ian Shepherdson of Pantheon Macroeconomics.

The news is not all bad, though.

Companies still need to invest after years of neglect, for one thing. And an ultra-low unemployment rate is forcing firms to spend on automation and other technology to cope with a growing shortage of skilled labor.

“A tight labor market could induce firms to invest more in capex to enhance the productivity of their existing workforce,” economists at Deutsche Bank said in an extensive analysis of corporate-spending trends.

The strong U.S. economy, what’s more, gives companies an incentive to keep investment going or risk losing business to competitors.

Let’s make a deal

The big wild card is China.

If trade tensions worsen and the Trump administration expands tariffs, the economy is likely to be harmed give the huge size of U.S. trade with China. Yet if the dispute is resolved soon it would remove a chief obstacle for business investment.

The temporary 90-day truce between the U.S. and China is sure to offer some relief, but businesses might delay some investment to see how negotiations pan out.

In any case, Deutsche Bank contends business investment should continue at a slower but still “healthy” pace through 2019. The bank’s economists say the available evidence does “not point to an imminent sharp deceleration that would send a more ominous signal” about the economy.

Related: ‘Good’ but ‘notably light’ — how analysts are reacting to the U.S.-China trade announcement

More from MarketWatch

Jeffry

Bartash

Jeffry Bartash is a reporter for MarketWatch in Washington.

We Want to

Hear from You

Join the conversation

Source : https://www.marketwatch.com/story/why-fading-business-spending-could-spell-trouble-for-trump-us-economy-in-2019-2018-12-04?mod=hp_minor_pos19

Why fading business spending could spell trouble for Trump, U.S. economy in 2019
A Remote Workforce Keeps Your Business Agile
Good things come in big packages
15 Best Bluetooth Speakers: The Heavy Power List
The Double-Edged Sword Of Social Media
10 brilliant tips for building a one-person business, by writer and designer Paul Jarvis
Stop Telling People to Not Use Their Phones All Day
2019 Audi E-Tron first drive review
Three more ways HR in the cloud makes sense for business today
A gentle introduction to blockchain scalability (Part I)