This may not have occurred to every “very stable genius” in the world, but deliberately creating one of the most uncertain operating environments in the history of modern capitalism is a good way to discourage business spending.
These are things I shouldn’t have to say. That you shouldn’t have to say. That no one should have to say. Let alone to the President of the United States who, George W. Bush aside, is generally expected to be something other than a hopeless dolt.
Alas… well, you know where I’m going with this. I don’t think I have to spell it out any further.
The figure on the left, below, shows Goldman’s measure of business optimism. It was above average and then, suddenly, it plunged to one of the lowest levels on record. As of late April, that metric suggests the C-suite feels nearly as bad now as they did when the Fed was hiking rates in 75bps increments, when a literal plague was visited upon humanity and when the fate of the entire global financial system hung in the balance.
Plainly, that abrupt collapse in business moods is attributable to the uncertainty created by “Liberation Day” and the specter of an all-out trade war which undermines, irreparably, the macroeconomic order as we’ve known it since the late 1980s.
The figure on the right, above, gives you sense of how large increases in economic policy uncertainty (as measured by the Baker, Bloom and Davis metric) impact corporate cash use. “We estimate that every 100ppt increase in policy uncertainty is associated with a roughly 10% reduction in cash spending growth, holding all else equal,” David Kostin wrote, in his latest.
Goldman slashed their S&P 500 use of cash forecasts last week on expectations of persistently elevated uncertainty and slower earnings growth. As the chart shows, uncertainty hits buybacks and cash M&A the hardest given they “tend to be the most volatile and adjusted most frequently based on the operating environment,” as Kostin put it.
The bank now sees just 3% EPS growth for this year, insult to injury when considered with rampant policy ambiguity given that it “means limited new cash flow generation to fund large cash spending increases,” to quote the same note.
Although Kostin still sees decent growth on the capex front (9%), that’s almost entirely attributable to the AI hyperscalers, without whom capex for corporate America would be unchanged this year from last.
I had a small epiphany this morning that everyone reading and responding here undoubtedly understands, using imports to keep prices down is a deeper concept than it may appear to many. Resources around the world are more scarce that ever, food, water, energy, natural resources and so forth are all over the world, but few are perpetually available or universally distributed. Best to get what we need from those who have them rather than using up our shrinking supply. Purchasing products from China, for example, keeps out prices down because their labor and other costs are cheaper than corresponding ones from here. Obvious perhaps, but in a country like China there is more to it than just the obvious. To produce our goods for us requires China to create housing we don’t overtly pay for, power, food, water, fixed capacity and other things that must be fully utilized to create maximum operating leverage and income for them. What ever resources are required to build goods for export to the US are at least somewhat inefficiently gained and we benefit from that inefficiency, something that would penalize us if we produced these goods on our own. Furthermore, China and others who send us exports are the ones who have to take the biggest hit when there are global downturns. All these countries Trump thinks are cheating us and stealing our precious bodily fluids (apologies to Dr. Strangelove) are, in reality, putting their own resources at risk and saving our own capacity from being used up, while saving us money.
Given the recent examples set by corporate America (led by the Mag 7), I believe your Exhibit 2 needs to include cash spending on a new category covering inaugural parties, vanity TV/movie projects and presidential library donations.