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Modest Growth Outlook Suggests Continued Capital Spending Weakness

October 11, 2016
John Portwood
John Portwood

Based on the current outlook for modest economic growth in the United States, look for the reluctance throughout corporate America to spend on capital programs to continue for the foreseeable future.

Capital spending has been notably weak for several years, largely because companies haven’t been bullish on growth prospects. Rather than embark on capital spending programs, companies have been using their cash to pay out dividends and buy back shares of their own stock.

This trend is likely to continue. With no uptick in growth prospects on the horizon, and a number of potential “wild card” developments that could throw a monkey wrench into next year’s modest growth projections, I don’t see businesses increasing their capital spending.


Modest Growth Outlook Suggests Continued Capital Spending Weakness 

The New Normal

Since 1945, the 10-year moving average for gross domestic product (GDP) growth is just shy of 3.25%, and Americans have come to expect that level of growth. But since the bursting of the housing bubble and the Great Recession of 2008, the average growth rate has dipped to a little below 2%. It’s clear the U.S. economy has undergone a structural change, and the growth rates we have seen in recent years appear to reflect the “new normal.”

A continued decline in money velocity (non-inflationary GDP divided by the money supply) suggests we’ll see a less than dynamic economy going forward. Other factors dampening growth prospects include a drop in labor force participation rates among the 25- to 50-year-olds who do much of the nation’s spending, and static wages. Since 2000, we’ve seen no gain in median real (inflation adjusted) per capita income.

Simply put, borrowing, lending and spending isn’t what it used to be. As a result, I expect the country to remain on the relatively weaker growth track we’ve been on since the recession.

If we manage to avoid any serious shocks to the economy, from a growth perspective I look for more of what we’ve seen in 2016 next year. My base case expectation for GDP growth in 2017 is 2%-2.5%.

Impact of the Presidential Election

Everyone wants to know how the upcoming presidential election will impact the economy. Usually the answer is clear-cut. In most election years, I can point to the candidate of lower taxes and regulation and suggest their election will be the most growth-friendly outcome. But with this year’s candidates and their platforms, there is much uncertainty. It’s very hard to say what the impact will be when one or the other is elected.

About the only prediction I can make is that no matter who becomes president, we’re probably going to get an increase in government spending on infrastructure. It may not be enough to enhance the growth rate, but hopefully it will allow us to maintain our current growth trend.


Other Wild Cards to Monitor

There are a number of wild cards that could potentially move us off our current modest growth track. Three to keep an eye on:

  • Federal Reserve action on short-term interest rates. Will the Fed raise rates at a faster clip than the economy can handle?
  • Oil price volatility. In the past couple of years, oil prices have dropped from over $100 a barrel to below $30 and then risen into the $40s, and the consensus is that in the next year they will climb again into the $50s or $60s. But what happens to debt-burdened oil companies if demand doesn’t materialize, production remains too high and prices drop precipitously again? And what would be the economic fallout of that?
  • More disruption in Europe. Will the United Kingdom’s exit from the European Union lead to other departures? It wouldn’t be too surprising. But if further disruption of the EU happens too quickly, it could create the type of shock that would be felt strongly in the U.S. economy.

The bottom line on future U.S. economic growth: The borrowing, lending and spending cycle that the United States enjoyed for the second half of the 20th century is gone and not coming back anytime soon. But, based on the new normal, there should be continued modest growth in 2017, and the odds of falling into recession next year, absent an external shock or federal policy mistake, should remain low.


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