US economy sees business-spending slump

Bloomberg

Consumers drove the US economy to better-than-expected growth in the third quarter, but a steep slowdown in business spending raised concerns about whether the strength in the expansion is sustainable.
The 3.5 percent annualised gain in gross domestic product, following 4.2 percent, marked the best back-to-back quarters since 2014, according to Commerce Department report.
The rise in consumer spending, which accounts for about 70 percent of the economy, unexpectedly accelerated to an almost four-year high of 4 percent.
Yet amid President Donald Trump’s trade war, nonresidential business investment rose at a 0.8 percent pace, the weakest since 2016 and down from 8.7 percent in the prior quarter. Companies paused spending earlier than some economists expected given the fiscal boost from Republican-backed tax cuts.
While a solid labour market and gradually rising wages are buoying consumers, investors took little comfort from GDP: The S&P 500 stock index
plummeted, entering a correction following reports showing the growth engines of Amazon.com Inc. and Alphabet Inc. sputtered last quarter. Analysts said the Federal Reserve probably remains on track for a December interest-rate increase, its fourth of 2018, though the GDP details suggest the economy isn’t shifting into a permanently higher gear.
“The fate of the consumer rests with the willingness and ability of businesses to keep hiring,” said Julia Coronado, president of MacroPolicy Perspectives LLC and a former Fed researcher.
The slowdown in business spending “came earlier and was more than we expected, given where the stimulus is,” Coronado said. “That suggests some of this stimulus won’t last, it’s not going to turn into higher-trend growth through the channel of investment and greater capacity and greater potential growth.”
The economy has reverted back to the “same old” model of consumer-driven activity that has dominated most of this cycle. Supply-siders will be disappointed to see business fixed investment essentially stalling out after a robust first half, further casting into doubt the notion that corporate tax reforms could incentivise capital deepening, which could lift the long-run growth potential of the economy, said Carl Riccadonna, Yelena Shulyatyeva and Tim Mahedy, Bloomberg Economics.
Trade also dragged down growth by the most in 33 years, amid ongoing tariff battles with large trade partners such as China. Together with the business-spending figures, they’re an early indication that firms might be cooling on the kinds of activities that drive expansion, employment and wages.