Business-Spending May Slowdown to 4.3% this Year, the Slowest Since 2003

A slowdown in business investment that the Federal Reserve expects to end without much damage to the economy may instead linger long enough to hurt job growth, according a article from Bloomberg today. Some key highlights include:

Private economists have cut their forecasts of business spending three times since December, and now expect it will grow this year at the slowest pace since 2003, according to surveys by Blue Chip Economic Indicators. That's after expenditures on equipment and software fell last quarter by the most in four years. The Blue Chip survey shows business fixed investment may rise 4.3 percent this year, the slowest pace since 2003. That forecast is down from a 6.2 percent rise estimated in December.

  • U.S. businesses have no shortage of funds to invest as profit margins at non- financial corporations hit the highest level in 37 years in the third quarter of 2006, according to the Commerce Department.
  • But some companies would rather use their cash to purchase their own shares than invest it in new plants or expanding payrolls. Last year, non-financial companies retired a record $602.1 billion of equity through buybacks and other means, according to Fed statistics. That's up 66 percent from $363.4 billion retired in 2005.
  • This year, profit growth is slowing as margins shrink. Analysts surveyed by Bloomberg News see per-share earnings growth among S&P 500 companies slowing to 6.8 percent this year from 16.6 percent in 2006.

For the global economy, increasing business investment in Europe and Japan may offset the slowdown in the U.S.

When business spending growth tapers off, a slowdown in hiring almost always follows, according to researchers at Commerzbank AG. Fewer new jobs would mean less consumer spending, deepening the malaise in a U.S. economy already burdened by slumping housing demand. The combination might force the Fed to shift its focus more toward shoring up growth.

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