In World Economy News 21/11/2016
One of the biggest challenges for the incoming Trump administration is to get businesses to open the spigot: weak investment has been a big drag on the economy.
Businesses have been especially reluctant to spend on new plants, buildings and equipment the past few years even as they continue to hire new workers at a brisk pace. That helps explain why the economy can’t grow much faster than 2% a year, one-third below its historic norm.
Consider: New orders for nonmilitary goods excluding the aircraft industry, a key measure of business investment, are down nearly 6% in the past year. And that kind of investment is off 11% from its postrecession peak in the fall of 2014.
Orders for durable goods in October, reported on Wednesday, are likely to show a solid gain of around 2%. But if it’s just another one-off, it won’t do much good in the long run.
Put simply, the U.S. needs more business investment in the long run to, in President-elect Donald Trump’s now-famous campaign slogan, “make America great again.”
Some good signs are evident. Gasoline is still quite cheap — good news for consumers — but rising prices have stabilized a U.S. energy industry that had been shedding jobs and slashing investment. A slump in the oil patch has been a big source of the drop in business spending the past few years.
Less helpful is the strong value of the dollar, which could get stronger still if the Federal Reserve raises interest rates soon as expected. A strong dollar makes U.S. goods more expensive, reduces exports and costs American jobs.
Minutes from the Fed’s Nov. 1-2 meeting, released the day before Thanksgiving, could shed more light on its plan to raise rates soon.
What now has to enter the equation of business planners is a sharply different approach taken by the Trump White House.
“Needless to say, the surprise victory of Donald Trump in the U.S. presidential election has changed the economic outlook on many fronts,” noted Carl Tannenbaum, chief economist at Northern Trust.
The new president wants to cut business taxes, reduce regulations and spend more on public works to make the U.S. a more hospitable place for business. He plans a full-court press in Congress.
A key Trump adviser, Steve Bannon, said in an interview with The Hollywood Reporter that he’s pushing for a breath-taking trillion-dollar investment in public works.
“With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything,” he said. “Shipyards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks.”
Such a grand if unlikely idea from a new Republican president is likely to draw lots of Democratic support. And major CEOs such as Jeffrey Immelt of General Electric GE, -0.39% are publicly applauding those goals. After years of divided government in Washington, executives are cautiously optimistic that a unified Republican party can break the gridlock on government-led investment.
The question is whether Republicans who’ve resisted similar ideas from President Obama are fully on board. Many are likely to resist a big increase in already large annual U.S. deficits.
Even if congressional Republicans abet Trump, businesses are unlikely to fully open the spigot until they see if Trump sticks to his campaign pledge to rewrite free-trade deals he views as unfavorable to the U.S. That’s a strategy that gives export-heavy companies nightmares about a potential trade war that harms economies all over the world.
“The economy is likely to be on an uncertain path until businesses see legislation and figure out what they are going to do,” said Steve Blitz, an independent economist based in New York.
Source: MarketWatch
