Among my most vivid memories of my years trying to make some sense out of the economy is one of a conversation with my late father. Since he was a tax lawyer for many decades, I once asked him if he supported some ideas that keep coming up for strengthening American manufacturing, chiefly making permanent the tax credit for corporate research and development (which Congress approved in 2015), and permitting companies to claim deductions for spending on machinery and equipment sooner rather than later, and even immediately (which the tax bill passed in 2017 allowed in some circumstances).
His answer: They’re small beans. His explanation: Any business-person with The Right Stuff will try and capitalize on new business opportunities whatever the tax laws allow (within reason).
I’ve been thinking of that conversation often as President Trump has waged his trade wars, especially against China (a long-time trade and broader economic predator), particularly in regard to the widespread claims that unanswered questions about his real aim (a bilateral level playing field? Decoupling the two economies?), and the herky-jerky nature of his tariff announcements and postponements have created enough uncertainty to paralyze business investment in new products and processes. Of course, that’s the type of activity that fosters healthy, sustainable, and not bubble-ized, growth.
I’m not unsympathetic to the difficulties of planning in this environment. But my father’s analysis makes me wonder if – assuming the uncertainty narrative is correct – too many American executives have lost their nerve. And this suspicion has just been borne out by a report spotlighting how many companies look to be plowing ahead with upgrades and innovations, trade war or not.
The evidence came from the latest monthly survey of mid-Atlantic state manufacturing published by the Philadelphia branch of the Federal Reserve system. As often the case, the October edition, released a week ago, featured responses to questions posed by “Philly Fed” researchers seeking regional manufacturers’ views on specific economic issues and challenges, and the current queries included:
>”Do you expect the following capital expenditure categories over the next year (2020) to be higher than the same, or lower than in the current year”; and
>”How has trade policy (including tariffs) affected your expected capital spending for 2020 compared with 2019?”
Here are the answers to the first question, by spending category measured in percentage of responses:
Higher Same Lower
Noncomputer equipment: 41.1 44.6 14.3
Software: 28.6 58.9 12.5
Energy-saving investments: 21.3 68.1 10.6
Computer and related hardware: 26.8 55.4 17.9
Structures: 32.1 45.3 22.6
Total: 39.1 41.3 19.6
No overwhelming evidence of uncertainty-induced paralysis here. If anything, mid-Atlantic manufacturers seem pretty determined to take steps they deem necessary to bolster their competitiveness even though the trade wars are far from over. Especially encouraging are the results for noncomputer equipment and structures, since they’ve been capital spending laggards lately.
And here are the answers to the second, more specific, question, about trade policy’s effects on capital spending plan, again measured in percentage of responses:
Significantly increase: 5.3
Modestly increase: 8.8
No change: 54.4
Modestly decrease: 15.7
Significantly decrease: 1.8
All increases: 14.1
No response: 14.0
All decreases: 17.0
These results add slightly to the case that Trump-ian trade policies are depressing capital spending. But only slightly.
Trade war opponents can point out that this year’s business investment has been weaker than the previous year’s, so that some capital spending increase was inevitable barring concerns about a major economic slowdown or recession. But supporters can observe that such spending was rising strongly from spring, 2017 through summer, 2018, and so some cooling off was just as inevitable (and not only for mean-reverting-type reasons, but because it would be natural for companies to try to finish current projects before starting new ones).
It’s also possible that mid-Atlantic manufacturers are simply pluckier than their counterparts elsewhere in America. But similar responses to similar questions were provided by southwestern companies in the Dallas Fed’s June manufacturing sounding. In other words, there’s lots of uncertainty surrounding the trade war-related uncertainty claims.