Slow pace of business investment weighs on Fed - Trade Only Today

Slow pace of business investment weighs on Fed

One of the things U.S. companies need to do so the economy will reliably grow is invest, and they have not been doing much of it in recent years.
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One of the things U.S. companies need to do so the economy will reliably grow is invest, and they have not been doing much of it in recent years.

As MarketWatch noted in a recent report, Corporate America’s investment shortfall is hurting the economy both now and for the foreseeable future. Unless they invest more, businesses can’t boost productivity. Unless workers are more productive, their employers can’t raise wages by a significant amount without hurting profits.

“There is a lot of uncertainty about what will happen to productivity growth,” Federal Reserve chairman Janet Yellen said last week after the central bank left its key interest rate unchanged.

Yellen also talked about other obstacles to growth — an aging labor force, low household formation and the weak global economy, USA Today said. The Fed now anticipates that its benchmark interest rate will be just 2.4 percent at the end of 2018, down from a March forecast of 3 percent.

“What you saw was the Fed capitulating,” economist Diane Swonk, of DS Economics, told USA Today.

Productivity has grown by an average of 0.5 percent a year for the past five years, compared with 3.5 percent during the recovery from the 2001 recession, say the federal Department of Labor and Dean Maki, chief economist of Point72 Asset Management.

“Businesses are holding back,” Jennifer Lee, senior economist at BMO Capital Markets, told MarketWatch.

A key economic report coming this week is on durable goods orders for May, and economists’ consensus estimate is that they fell 0.7 percent. The important measure of business spending will be issued Friday, as will the final reading for June of the University of Michigan’s Consumer Sentiment Index.

That barometer is expected to remain at its mid-month level of 94.3, which represented a slight decline from the previous month. American consumers have been cautious spenders, but they’ve remained believers in the broader U.S. economy.

Yellen heads to Capitol Hill this week for semiannual hearings on the state of that economy. She will testify before the Senate Banking Committee at 10 a.m. EDT today and before the House Financial Services Committee at the same time Wednesday.

“It is always a minefield when the Fed chair goes to these semi-annual hearings, but there are even more mines in that field this time around,” Steve East, an analyst at Height Securities, a research firm that focuses on geopolitical and regulatory investment risk, told MarketWatch.

The hearings could be tense and combative. Democrats and Republicans remain far apart on economic issues.

“Yellen will steer as clear as she possibly can of anything political,” East said, although he notes that it will be difficult for her to do so as lawmakers press her on key issues.

The housing industry has been a bright spot, and the existing-home sales report for May will be issued Wednesday as Yellen begins her testimony before the House panel.

Economists expect that home resales were at a seasonally adjusted annual pace of 5.6 million during the month, up from 5.45 million in April, which represented a 1.7 percent increase from March. The National Association of Realtors said when it released the April report that it saw the existing-home sales market slowly building momentum for the spring.

The new-home sales report for May will be out Thursday morning. The pace of sales is expected to be 560,000 at a seasonally adjusted annual rate, down from 619,000 the previous month. The April figure represented a more than eight-year high and new-home prices surged to a record during the month.

At that time Chris Rupkey, chief economist at MUFG Union Bank in New York, was telling Reuters, "Consumers are taking the leap and buying the biggest of big-ticket items of their lives, and this speaks to confidence. The Federal Reserve can raise rates at their June meeting without fear the economy is going to slow."

What a difference a month’s worth of data can make.

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