(Bloomberg) -- The longest pullback in U.S. business investment since 2009 shows little sign of ending, which could weigh further on the economy this year just as the once-gangbusters household spending that had been picking up the slack also slows down.
Thursday’s fourth-quarter data on gross domestic product showed steady top-line expansion of 2.1% that reflected a big boost from falling imports and masked a weaker composition of growth. Nonresidential investment fell an annualized 1.5% in the third straight decline, while consumer spending decelerated to a 1.8% gain, below projections after the strongest consecutive quarters since 2015.
Economists are mostly forecasting a modest step-down in growth this year rather than a deeper slump or recession. But factors including still-lingering trade uncertainty, Boeing Co.’s production halt on the 737 Max and the coronavirus outbreak will likely keep capital spending subdued.
Any weakness could complicate the re-election prospects of President Donald Trump, with the economy also facing the waning effects of tax cuts and cooling wage gains that already make his 3% growth goal difficult at this point in the record-long expansion.
“The outlook for the business investment side of things is pretty dark,” said Kevin Cummins, senior U.S. economist at NatWest Markets. “If we are starting to see the consumer slipping, it’s certainly going to add to concern among decision makers and CEOs.”
Investors appear to be increasingly fretting about the outlook. A key slice of the U.S. yield curve inverted Thursday for the first time since October, reviving memories of growth fears last year. U.S. stocks were on track to drop in consecutive weeks for the first time in almost four months.
Thursday’s data showed a closely watched gauge of underlying demand, which strips out the volatile trade and inventories components of GDP, expanded 1.6% in the quarter. Without government purchases, that number looked even weaker at only 1.4%, the slowest in four years.
The broad question for the economy is whether investment softness will eventually spread to America’s still-solid jobs market and weigh on consumer spending.
Recent figures show hiring remains solid. The jobless rate is at a 50-year low and companies continue to complain of challenges filling empty positions. A separate Labor Department report Thursday showed filings for unemployment benefits fell last week.
Strong Confidence
Furthermore, consumer confidence is still elevated, suggesting Americans will continue to spend. And if business demand slows, companies are likely to cut working hours first before eliminating jobs. A measure of hours worked has showed little deterioration so far outside of manufacturing.
The fourth-quarter pullback in corporate investment in equipment and structures spanned industries but was specifically concentrated in sectors like manufacturing, construction, health care and energy. The rise of online shopping likely contributed to the weakest investment in shopping centers and malls in records back to 2002.
The president has highlighted the economy’s strength in his re-election campaign. Indeed, healthy job creation, cheap borrowing costs and signs of stabilization in global manufacturing after trade agreements between the U.S. and its biggest trading partners should support the economy going forward.
But if further investment cutbacks ultimately lead to job cuts -- like those already seen in manufacturing across swing states like Wisconsin, Michigan and Pennsylvania -- it could make things more challenging for Trump.
Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., is taking a bearish tack. He expects growth to slow to just over 1% year-over-year in the fourth quarter in 2020 as cost-cutting among businesses continues.
“Pressure on corporate profit margins, which has already begun, is going to worsen in coming quarters, which in turn will prompt increasingly aggressive cost-cutting, with resulting slowing in job growth and weaker capital spending,” Shapiro wrote in a note.
What Bloomberg’s Economists Say
“Real GDP growth in the fourth quarter was slightly firmer than consensus expectations, but the underlying details painted a much bleaker picture.”
-- Yelena Shulyatyeva, Andrew Husby and Eliza Winger
Click here for the full note.
Slower consumption growth and lackluster corporate investment is consistent with the message from central bank policy makers. The Fed, in a statement Wednesday at the conclusion of a two-day policy meeting, softened its characterization of household spending growth to “moderate” from “strong” as “business fixed investment and exports remain weak.”
Chairman Jerome Powell said at a press conference that while the recent U.S. trade deals are potentially positive for the economy, uncertainty over trade policy “remains elevated” for businesses, and the agreements will take some time to affect growth.
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