Bridgewater Daily Observations
Early Signs of Business Investment Slowing
Business fixed investment looks like it is slowing and may become somewhat of a drag on US growth in the coming months. There have been several indications of this: Wednesday's durable goods report was soft, corporate comments on investment plans have become more negative as sales stagnated in the first quarter, and most surveys on business investment plans are also pointing to a slowdown. Pro-cyclical capex providers continue to underperform the broader market even as stocks as a whole make new highs, suggesting that while abundant liquidity is finding its way into the overall market, less is finding its way into the real economy.
At this point in the expansion, levels of investment have largely normalized and businesses in most sectors are operating close to capacity. Accordingly, it makes sense that business spending growth should roughly track underlying demand growth (both external and domestic). Recently, the slowdown in global sources of demand appears to be a significant source of the weakness we've been seeing related to business investment plans. External demand, along with overall trading partner growth, has been weakening over the past several months and is now mediocre. Consistent with this deterioration, companies that have a more significant exposure to foreign demand have been underperforming the overall market. Meanwhile, domestic demand, which had been accelerating, softened a bit most recently and faces short-term headwinds related to fiscal tightening. So while we still expect to see healthy business fixed investment numbers for the first quarter (as a result of strong shipments earlier in the year), the soft March report on durable goods looks more in line with the rest of the evidence we're seeing, which is all pointing to a moderation in business fixed investment.