Kiplinger’s Business Spending Outlook: Investment to Weaken as Global Economy Slows

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Business spending, especially on capital equipment, will be dinged this year, both because of an uncertain economic outlook, and because bank lending has tightened in response to the troubles in the banking sector. Banks and other lenders recognize that they are under greater scrutiny these days, and so will tend to be more cautious about lending.

Labor costs will continue to rise at a faster-than-usual pace this year. Annual wage growth should ease from 5% now to about 4% as the economic slowdown reduces hiring, but will still be above the normal 3% rate. Wage growth will remain elevated in areas of continuing labor shortages, such as health care, and in the Southern states and Texas, where large in-migration has increased demand for services.

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Prices of some materials, such as copper and steel, have been rising because of expectations that China’s demand will rise in the future. China’s economic growth was expected to strengthen after the lifting of COVID-19 restrictions, but the slowing in Western economies is reducing demand for China’s exports. The outlook for copper prices is an advance back to near-record prices this year, as a cut in Chile’s production makes it unlikely that low world inventories of the metal can be replenished. But steel prices are likely to move sideways, as China’s manufacturing sector and nonresidential building are still weak.

Some qualified good news for electric-vehicle battery makers: The prices of lithium and cobalt — two raw materials needed for EV batteries — have dropped rapidly this year, but that’s because battery production has outpaced demand.

Demand for semiconductors has tanked in the consumer electronics sector, so these types of chips are in abundant supply as a result. But the availability of automotive and some other specialty chips is still limited. Chips for computers and phones are in surplus as demand wanes, but microcontroller and automotive chips still face shortages. Ramping up production takes time, as factories take years to build. Another problem: Like most complex industrial machinery, chipmaking equipment requires chips, too. In short, expect limited supply for much of this year in the areas where shortages still exist. But if a recession happens, the remaining shortages would likely ease.

Sources:

• Census Bureau, Durable Goods Report (opens in new tab)
• Census Bureau, Business Inventories (opens in new tab)