Trade Uncertainty Still Weighing on Capital Investment

Economic Blog
August 27, 2019

Business investment remains a critical component for this economic expansion.

Capital expenditures (capex) drive productivity gains (more output per hour worked), which enables economic growth while keeping inflation contained. That helps keep the Federal Reserve (Fed) at bay.

We received an important data point on business investment yesterday, August 25. While headline durable goods orders beat expectations, demand for aircraft drove the increase. Excluding transportation, durable goods orders fell by 0.4%, and the prior month’s figure was revised down to 0.8% from 1%.

On a year-over-year basis, as shown in the LPL Chart of the Day, Slowing Durable Goods Amid Trade Tensions, durable goods orders excluding transportation have been flat over the past year and growth has been slowing since June 2018—covering the bulk of the trade dispute. Year-over-year growth in orders for nondefense capital goods (excluding aircraft) has also grounded to a halt, averaging just 0.3% over the last three months.

 

“Productivity-enhancing capital expenditures are critical for elongating this economic expansion,” said LPL Research Chief Investment Strategist John Lynch. “Capital investment has softened because of the trade dispute with China, which puts more of a burden on the U.S. consumer to continue to drive economic growth. That can continue for only so long.”

Trade tensions continue to weigh on capital investment and overall economic growth, which is one reason we reduced our 2019 gross domestic product (GDP) growth forecast to 2% (down from a range of 2.25–2.5%). Yesterday’s report told us that business investment is unlikely to contribute to third quarter GDP, which is only expected to grow at a 1.8% annualized rate (Bloomberg consensus).

Markit’s soft preliminary (sometimes called “flash”) manufacturing Purchasing Managers’ Index (PMI), reported August 22, also highlighted the cautious business investment environment. The August reading dipped below 50, in contraction territory, for the first time since the financial crisis. The official Institute for Supply Management (ISM) PMI manufacturing survey, due out September 3, will provide another glimpse into the business investment environment. Given the latest salvo in the U.S.-China trade conflict, another soft reading appears likely in the cards.

IMPORTANT DISCLOSURES

Please see the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets for additional description and disclosure.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

Purchasing Managers Indexes are economic indicators derived from monthly surveys of private sector companies, and are intended to show the economic health of the manufacturing sector. A PMI of more than 50 indicates expansion in the manufacturing sector, a reading below 50 indicates contraction, and a reading of 50 indicates no change. The two principal producers of PMIs are Markit Group, which conducts PMIs for over 30 countries worldwide, and the Institute for Supply Management (ISM), which conducts PMIs for the US.

Market implied rate hike expectations are calculated based on the pricing of various fed funds futures contracts.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

All company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (Member FINRA/SIPC).  Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.

If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit

Member FINRA /SIPC

For Public Use | Tracking # 1-887073