Businesses Reluctant to Spend - Capstone

Businesses Reluctant to Spend, Report Says

16:57 29 April in Blog

In a time when consumers are holding their funds close and avoiding spending, a recent report found that businesses are being even more cautious. These findings are likely to weigh heavily on Federal Reserve officials as they consider raising the Federal Fund Rate, despite the fact that they recently decided to delay any increase until at least June.

Business Spending Faltering

Aside from orders for aircraft and defense-related goods, business investment declined by 2.4% in the first quarter of 2016. That means that many companies are reluctant to buy staples like electrical appliances, computers, equipment and heavy machinery. These numbers are reflective of a somewhat bleak economic picture: productivity is low, demand is weak at home and abroad, wage growth is weak, and the global economy is experiencing increased volatility as China’s production slows down.

Earnings Season and Poor GDP Growth

On April 28th, the Wall Street Journal’s prediction of 0.7% first-quarter GDP growth was proven incorrect, and the number rung in at just 0.5%. This bad news came in the wake of earnings disappointments for several major U.S. companies—most notably Apple. Some economists are noting that after years of constant growth, the U.S. economy is bound to plateau. The question remains whether this is a broad market correction or the beginning of a prolonged downturn.

Reasons for Optimism?

One bright spot in the economy is the job market, which has posted steady gains over the last several months. Oil and gold prices have rebounded dramatically in the first quarter, though credit for these recoveries can be attributed to a weakening dollar which inflates their value. Though new orders for durable goods would be expected to rise with a weakening dollar, a recent Commerce Department report found that new orders rose just 0.8% in March—the majority of which were for aircraft and defense-related goods.

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