The Washington PostDemocracy Dies in Darkness

Economy slows, Fed hits brakes, and uncertainty clouds Washington’s next steps

Business investment contracts for second straight quarter, as companies pull back amid concerns

Wisconsin Aluminum Foundry CEO Sachin Shivaram speaks to employees Tyler Conen, right, and Ryan Seitl on Oct. 16, 2019. The company has seen orders collapse during an emerging recession in the manufacturing sector. (Lianne Milton for The Washington Post)

A sharp contraction in business spending is slowing the U.S. economy and could cause deeper pain going forward, but political leaders and policy makers are giving almost no signals about what they plan to do next.

The Commerce Department on Wednesday said the U.S. economy grew at a 1.9 percent annualized pace from July through September, far short of the 3 percent sustained clip that the White House promised would result from the 2017 tax cut law.

Several hours after the Commerce announcement, the Federal Reserve cut interest rates by a quarter percentage point to just under 1.75 percent in a bid to spur more growth. But the central bank also hinted that there might not be any more interest rate cuts on the horizon, as officials plan to monitor developments going forward, despite constant pressure from President Trump to do more.

“Weakness in global growth and trade developments have weighed on the economy and impose ongoing risks,” Fed Chair Jerome H. Powell told reporters after the decision. But he added that the Fed’s current stance is “likely to remain appropriate.”

The Fed’s new wait-and-see approach is one of many Washington decisions that is now up in the air, clouding the outlook going forward.

The U.S. deficit hit $984 billion in 2019, soaring during Trump era

Congress and the White House still have not passed legislation to fund most of the government after November 21, and an impasse could lead to another shutdown. President Trump has tried to secure a partial trade agreement with China for next month, but planning was in disarray Wednesday when the Chilean summit where he hoped to finalize the agreement was cancelled. And the outcome of the 2020 election could lead to a markedly different change in trade, tax and regulatory policy, a prospect that can lead businesses to move more cautiously when it comes to spending and hiring.

A number of factors are weighing on the economy, but Powell pointed to the trade concerns and slowing global growth as worries at the top of the list. He also said, however, that there were signs that the trade skirmish with China could ease if Trump can broker a partial deal with Beijing next month, and Powell expressed confidence that consumer spending could remain strong. Helping matters, the unemployment rate remains at a half-century low, the stock market is at very high levels, and the housing market has recently shown signs of rebounding.

The Commerce Department data show that consumer spending continues to power the economy, but business investment has now contracted for six straight months, falling 3 percent in the third quarter, the biggest drop since the end of 2015. In recent announcements, a number of companies have said they are pulling back or pausing investment because of economic uncertainty, particularly related to Trump’s trade war with China.

“We’re still in the middle of really trying to understand where the trade talks are going to land and how that’s going to impact the overall economy,” GM chief executive Mary Barra said on an earnings call this week.

Spending on both structures and equipment was deeply negative from July through September, Commerce reported, and manufacturing is currently in a technical recession.

“In general, uncertainty still seems to kind of reign,” Robert Biesterfeld, chief executive of logistics company C.H. Robinson, said in an earnings call Wednesday.

The U.S. economy amounts to more than $21 trillion in goods and services each year. It is driven largely by consumer, business, and government spending, but its health can changed based on external shocks, trade decisions, and public policy, such as changes in the tax code.

Trump has made economic growth a defining issue of his presidency, but growth is now weakening. It grew 2.9 percent in 2018 but in the past six months it has appeared to have returned to the slower pace it notched during the final year of the Obama administration. Powell stressed, however, that he expects the economy to continue growing and the Fed is not forecasting a recession is near. Low unemployment, rising wages, and high stock prices have helped fuel consumer spending. Higher federal government spending also provided some lift to growth, helping offset the business investment decline.

“The consumer is still the main engine of economic growth, plus federal government spending. The nation just capped off a year of nearly a trillion-dollar deficit. Not surprisingly, all this federal spending is showing up in the GDP numbers," said Stuart Hoffman, senior economic adviser at PNC Financial Services Group.

Trump has sought to highlight elements that he perceives as strengths in the economy, and top White House officials believe this should be a main plank of his reelection bid. Shortly before the new economic data was released, Trump wrote on Twitter that this was “The Greatest Economy in American History!”

Asked about Trump’s comment on Wednesday, Powell declined to comment.

Some White House officials have privately expressed concerns that the economy is entering a slowdown. After a weak second quarter, White House officials were hopeful that there would be a big rebound, in part because they wanted to resolve trade issues with China and complete a revised trade agreement with Mexico and Canada. Complicating matters in the third quarter, which is reflected in the new Commerce data, the White House veered multiple times in its approach to the economy. Within a matter of days, Trump announced that he was interested in a new tax cut package, then cancelled the plans, then said he wanted U.S. companies to prepare to withdraw from China.

The wild moves left many companies – and investors – spooked about the White House’s approach, and that was reflected in the Commerce data about new business spending.

“The capital spending numbers were awful, and a bit worse than we expected, with structures investment -- oil rigs, offices, factories, commercial premises -- plunging 15.3 percent,” said Ian Shepherdson chief economist at Pantheon Macroeconomics.

Trump’s economic agenda has resulted in tax cuts, deregulation, trade fights, and spending increases. He and top aides have said this approach would lead to a major acceleration in economic growth, which had slowed markedly during President Obama’s last year in office. The unemployment rate has fallen since Trump’s election from 4.7 percent to 3.5 percent, consumer confidence and spending are strong, and the stock market reached a new all-time high this week.

Economists would typically expect that after businesses cut back on spending, they would start laying off workers to save costs, which would lead to decreased consumer spending. But as of yet consumers continue to prop up the expansion. Almost half of the third quarter’s growth could be attributed to residential construction and spending on recreational goods such as computers, bicycles and books, as well as at grocery and liquor stores.

Trump has continued to celebrate any good economic news, including the stock market record this week, and blame any weak numbers on Democrats and the Federal Reserve, the institution he says choked growth by keeping the cost of borrowing too high.

Though he has in the past responded quickly to any announcement by the Fed, he was silent after they made their announcement Wednesday.

The U.S. economy is in the midst of its 11th straight year of growth, making this the longest expansion in the nation’s history.

During Trump’s term in office, the economy has grown at an annual pace of about 2.35 percent, after accounting for the effects of inflation and other factors. If that pace were to continue, it would edge past George W. Bush’s first term and Obama’s second to become the fastest term of growth since Bill Clinton’s presidency.

But economic growth has fallen short of the performance recorded under other presidents. In the recent past, Clinton and Ronald Reagan each oversaw two terms of growth above 3 percent a year. Growth of at least 2 percent has been the norm for decades -- the U.S. typically hits that mark in two out of every three quarters.

Diane Swonk, chief economist at Grant Thornton, called the downturn in business investment ugly. “This stage in the expansion is usually when businesses walk with confidence instead of caution,” Swonk said, “but what we’re seeing is almost as if businesses are walking on eggshells and afraid to make a commitment to the future.”