Businesses are showing little appetite for investment in items such as heavy machinery and computers, a trend that is likely acting as a drag on the economy.
A proxy for business investment fell at the fastest rate in three years in January, according to a report out last week. New orders for capital goods, excluding defense and aircraft, fell 6 percent in January after adjusting for seasonal variations. That was the third drop in four months and the biggest since January 2004, the Commerce Department said.
While the numbers are notoriously volatile, the sharp drop last month raised concern among investors and economists that businesses are stepping on the brakes.
“This trend is not something that makes one comfortable about the strength of the economy,” Naroff Economic Advisors President Joel Naroff said in a note to clients.
The data follow other reports that have shown businesses may be growing more cautious.
Business investment fell in the fourth quarter for the first time since early 2003, according to government data. A survey of 446 chief financial officers in November showed businesses expected to increase investment by less than 5 percent in the next year, a drop from a 7.5 percent gain in June, according to the study by Duke University and CFO magazine. A survey of CEOs by the Business Roundtable also has shown a decline in spending expectations.
Up, And Down
And while more than 40 percent of manufacturers said in a Federal Reserve Bank of Philadelphia survey in January that they expected to increase investment, 21.7 percent said they planned to reduce investment, the biggest number since the question was first asked in January 2004.
A number of factors are making businesses scale back spending, says John Graham, a finance professor and director of the CFO survey at Duke University’s business school. Interest rates have increased and energy costs, although off the record highs hit last year, are still elevated. Businesses are also watching how the slowdown in housing affects consumers.
Companies “are just going to be cautious in that environment,” Graham says. “The last thing they want to do is build the extra capacity and they (later) find it is not needed.”
The caution comes even though business balance sheets are in good shape, according to the Federal Reserve. Companies’ financial assets were up 4 percent in the third quarter from the prior year, the latest data.
Business investment accounts for about 11 percent of U.S. Economic activity vs. 70 percent for consumer spending. But business investment is still important to watch as a barometer of how company owners are feeling about the economy, which can influence hiring, salaries and other factors that can affect consumers, Union Bank of California senior economist Keitaro Matsuda says.
“Their sentiment is reflected in their buying and purchasing patterns,” he says.