US business investment wanes despite economic growth

by Kimberly Greene27 Sep 2019

Despite positive news coming from the housing market, doubt continues to hang around the economy as US. business investment shrank more than anticipated in Q2 and corporate profit growth was moderate.

The soft investment and sluggish profit gains, reported by the Commerce Department on Thursday, could raise doubts about consumers’ ability to continue driving the economy. There is a lot of economic uncertainly surrounding investment and exports, said Federal Reserve Chair Jerome Powell, and although a strong labor market is continuing to boost consumer spending, there is an ongoing risk to the current economic expansion, which is in its 11th year.

Powell said US central bank contacts had told policymakers that trade policy uncertainty “has discouraged them from investing in their businesses.”

The Fed cut rates twice in the past two months, the first cuts in more than a decade.

“Given the uncertainty in the economy, businesses are very cautious about spending in construction as well as equipment, and this is not a very good sign,” Sung Won Sohn, a business economics professor at Loyola Marymount University in Los Angeles, told Reuters. “After all, businesses are the ones hiring people, providing income and the buying power for consumers.”

Business investment declined at a 1% annualized rate last quarter, the government said in its third reading of second-quarter gross domestic product. That was the steepest decline since the fourth quarter of 2015.

Business investment was previously estimated to have dropped at a 0.6% pace. It was pulled down by an 11.1% rate of decline in spending on structures, which reflected decreases in the categories of commercial and healthcare, and mining exploration, shafts and wells.

Gross domestic product increased at an unrevised 2% rate in the second quarter as the strongest consumer spending in 4 ½ years offset weak exports and a slower pace of inventory investment. The economy grew at a 3.1% rate in the January-March quarter. It expanded 2.6% in the first half of the year.

But when measured from the income side, the US economy grew at a 1.8% rate in the second quarter. Gross domestic income (GDI) was previously reported to have increased at a 2.1% pace in the April-June quarter. It rose at a 3.2% rate in the first quarter.

The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, rose at a 1.9% rate last quarter, rather than the 2.1% pace estimated last month. That was a slowdown from a 3.2% pace of growth in the first three months of the year.

Economists are forecasting 2019 growth to be around 2.5%.

Consumer spending accounts for more than two-thirds of US economic activity, and was up at a rate or 4.6% in the second quarter—the fastest growth since the fourth quarter of 2014. Consumer spending is partly about confidence and partly about having money to spend, and while the labor market is strong, experiencing the lowest unemployment rate in nearly 50 years, consumer confidence can be much less stable. Duties on Chinese consumer goods could slow spending, and more tariffs are expected, although the president has said that a deal with China could come sooner than expected.

“If all the trade tariffs on China get pushed to 30% across the board then this will take a toll on U.S. economic growth next year, slowing the economy closer to the so-called 1% stall speed where bad things can happen,” Chris Rupkey, chief economist at MUFG in New York, told Reuters.

Growth in inventories sliced off 0.91 percentage point from GDP growth last quarter as reported in August. Inventories could continue to weigh on output this quarter. The government also reported on Thursday that retail inventories were unchanged in August after rising 0.7% in the prior month.

Retail inventories, excluding motor vehicles and parts, the component that goes into the calculation of GDP, were also flat last month after increasing 0.4% in July.

Government investment in the second quarter was raised as state and local government spending was much stronger than previously thought. Spending on homebuilding contracted for a sixth straight quarter, the longest such stretch since the Great Recession.