US economy

US companies show caution on spending


The chill in spending on new factories and equipment by big US companies appears to have persisted through the third quarter of 2019, according to the latest round of earnings reports, which featured warnings from executives that budgets are likely to slow further in the final months of this year.

Capital expenditure grew 3.2 per cent in July to September, judging from the four-fifths of S&P 500 companies that have so far released earnings for the period, as tracked by Refinitiv. That is roughly in line with the previous quarter — which marked the lowest growth rate in two years — but is far behind the double-digit growth in capex that accompanied last year’s tax reform initiated by President Donald Trump.

Company executives have also indicated during earnings season that the pace of growth will slump to 1.8 per cent in the fourth quarter, underlining the shadow cast on boardrooms by trade wars and other global factors.

“Corporate cash spending will continue to face pressure as management teams deal with persisting uncertainty,” David Kostin, chief US equity strategist for Goldman Sachs, said in a research note. On third-quarter earnings calls “many executives highlighted deferring capital expenditures as they approached investments with increased caution”, he said.

Column chart of Quarterly year-over-year growth in capital expenditure for S&P 500 companies (%) showing Companies slow capex spending

Mr Kostin pointed to companies across a range of sectors as evidence of the trend, including the banking giants JPMorgan Chase and Citigroup, the tobacco group Philip Morris and the aircraft makers Boeing and Textron, a Rhode Island-based manufacturer known for the Cessna brand.

Scott Donnelly, Textron’s chief executive, said on the group’s third-quarter earnings call that the US-China trade negotiations and Brexit were weighing on decision makers. Businesses “are deferring capex investments, be it business jets or otherwise, because of [these] uncertainties”, he said.

Sputtering growth in capex and the lowest level of CEO confidence in a decade have failed to subdue investors’ appetite for US stocks, with the S&P 500 benchmark hitting a record high on Friday.

Confidence over the strength of demand tends to drive spending decisions, which in turn can improve a company’s productivity, said Nancy Tengler, chief investment officer for Laffer Tengler Investments in Phoenix, Arizona. Having both fall in tandem is “worrying”, she said.

Corporate leaders appear to be waiting for greater clarity on the trade negotiations between the US and China before committing to new projects, Ms Tengler added. “It looks like CEOs have thrown in the towel until trade is settled,” she said.

Companies are also spending less on stock buybacks, which last year hit a record $806bn.

Column chart of Quarterly share repurchases by S&P 500 companies ($bn) showing Buybacks slow from record highs

US blue-chips spent $184bn on their own stock in the third quarter, a 10 per cent drop from the same period last year, according to earnings reports from 90 per cent of companies in the S&P 500 compiled by Howard Silverblatt, senior index analyst for S&P Dow Jones Indices.

The third-quarter spending on buybacks puts the full year total on track to hit $748bn. This would mark a slowdown from last year, but remains a gain from the $519bn spent in 2017, before the corporate tax cut came into effect. “It’s less than last year, but it’s still a significant amount,” Mr Silverblatt said.



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