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Despite widespread claims from investors, economists, and individuals on the internet, the anticipated US recession has not yet materialized.
Gillian Tett recently highlighted the divergence between consumer sentiment and actual data. Almost half of Americans surveyed by TransUnion believe that the US is already in a recession, yet retail sales remain strong.
Similarly, business investment continues to thrive despite CEO pessimism, rising interest rates, fluctuations in stock markets, concerns over commercial real estate, and even a minor banking crisis that led to many lenders pulling back. Goldman Sachs, in a report released today (public link here), estimates that capex has grown by 3.5% over the past year. While a slowdown is expected, Goldman predicts that capex will remain robust enough to exceed its previous forecasts for overall economic growth.
The main points from the report are as follows:
– Business investment has grown by a solid 3.5% over the past year, defying consensus forecasts of sharp declines typically observed in recessions. However, weak business sentiment, banking stress, and declining investment in office spaces pose potential threats to capex growth in the future. This report analyzes the outlook and discusses how these three headwinds will affect business investment.
– Survey-based measures of future capital spending expectations have reached their lowest levels since the financial crisis and are currently in contractionary territory. However, concrete indicators of spending plans have not declined as sharply. A capex-specific tracker based on hard data, which historically has been a better predictor of realized capex, has remained positive throughout this year.
– The Federal Reserve’s H.8 release indicates stagnation in bank lending to businesses in recent weeks. The slowdown in bank lending poses a significant threat to structures investment, particularly in commercial real estate. However, small businesses report in the NFIB survey that they have not faced increased difficulty accessing credit since the bank failures.
– Certain segments of structures investment face weak underlying conditions. Office investment is expected to decline further due to a significant increase in office vacancy rates, while guidance from energy companies suggests a continued decline in oil and gas investment. However, strong domestic manufacturing investment incentivized by the CHIPS Act and the Inflation Reduction Act may partially offset these challenges. Over the past two years, companies have committed to $365 billion in new semiconductor and battery investments, of which less than one-fourth has been spent.
– While structures investment growth is likely to turn slightly negative after a 3.1% increase over the past year, equipment investment growth is expected to rebound following a 1.2% decline. Intellectual property product investment is expected to slow from the previous year’s pace of 6.2% due to businesses limiting growth in IT investments amid economic uncertainty and the immediate post-pandemic surge in demand.
– In conclusion, business fixed investment growth is projected to decelerate from a +2% annualized growth rate in the first half of 2023 to a roughly +1% annualized rate in the second half, before rebounding to a +3% rate in 2024. This new trajectory translates to a 2023 GDP growth of 2.0% on a full-year basis (compared to a consensus of 1.3%) or 1.6% on a Q4/Q4 basis.
Goldman is generally known for its optimistic forecasts. Click here to read the full report and form your own opinion.
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