US companies are watering down their spending plans as the threat of slowing global growth and the trade war sap business confidence.
Capital expenditure, or capex, is set to grow 3.5 per cent this year, a sharp drop from the 4.2 per cent anticipated just four months ago, according to Citi analysts. The downward revisions reflect the spending plans of 714 listed US companies, excluding financial groups, and echo the drumbeat of dire sentiment data that began to appear late last year indicating businesses would curtail their investments.
The revisions come at a pivotal time for markets as the trade war between the US and China and a string of poor economic data have triggered a surge in market volatility and sent investors rushing into safe assets such as US government bonds.
“Capex has been one of the biggest concerns about the state of the economy,” said Max Gokhman, head of asset allocation for Pacific Life Fund Advisors. “This year we’re seeing uncertainty hurt capex — it has continued to dwindle.”
Capex is often used as a rough gauge of future profits and surged 11 per cent last year as companies tapped fresh pools of capital unlocked by the Trump administration’s corporate tax cuts that clipped the rate from 35 per cent to 21 per cent. Spending is set to expand, but the lower growth levels and recent downward revisions are beginning to spook investors that businesses will be too cautious on fears of an economic downturn.
Technology hardware companies appear particularly vulnerable to the twin pressures of a slowing growth outlook and trade tariffs with China. While most sectors are poised to moderately increase spending, tech firms will cut capex 8.7 per cent — a figure Citi pegged at just 3.1 per cent in May.
US tech giant Cisco last week revealed a drop in orders for its networking equipment as companies begin to shy away from upgrading their systems fearing slower growth. “Cisco is a great example — they got hit on China sales but also companies are not upgrading their networks,” said Mr Gokhman. “That is all contributing to the dearth of investment.”
Industrial companies will grow capex 3.7 per cent, down from 8.4 per cent in May, while materials will spend 14 per cent more, down from an estimated 26.2 per cent four months ago, according to Citi.
The Citi data reinforces other indicators that reflect dampening growth. Anticipated capex spending has slid since the start of the year, according to polls of chief executives conducted by the Business Roundtable, while small business spending survey data from the NFIB also shows softening figures.
“Business confidence tends to impact corporate investment activity and hence the various factors affecting C-suite concerns like trade issues and overseas weakness appears to be influencing behaviour,” said Tobias Levkovich, Citi’s chief US equity strategist.