Kiplinger Business Spending Outlook: Still Cautious for Now, Stronger Later

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Business spending on capital equipment is still slow, as businesses wait for the Federal Reserve to lower interest rates. Inflation-adjusted shipments and new equipment orders have been declining for two years, as interest rates rose, lenders tightened loan standards, and the economic outlook remained cloudy. 

But that could change whenever the Fed signals that it plans to start lowering interest rates, and business sentiment improves as a result of that signal. The Fed may not actually start cutting rates until after the presidential election, but it could signal its intent to do so earlier. 

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Financing costs have eased a bit since last year, now that it appears the Fed’s rate-hiking campaign is over. But those costs are still high, roughly double what they were just two years ago. Business demand for loans remains sluggish, because of both previous expectations of modest economic growth and higher borrowing costs. Small businesses have been hurt the most by high rates and have pulled back the most on borrowing.

Labor costs should increase at a slower pace in 2024, but that easing process is happening gradually. Annual wage growth should dip from 4.1% now to about 3.6% by the end of 2024, as the frenzied pace of hiring eases, and as lower inflation reduces cost-of-living pay raises. Wage growth will be highest in sectors with continuing labor shortages, such as healthcare, and in the Southern states and Texas, where rapid in-migration has increased demand for many services. 

The cost of shipping by truck will rise over the rest of the year, but very slowly. Trucking spot rates will start to gradually rise, by 8% this year and another 8% in 2025, as demand for freight shipping improves and some of the excess capacity in the industry is gradually squeezed out. Contract rates will follow with a lag, with a modest rise by the end of 2024 and a roughly 5% increase in 2025. These increases will be concentrated in the dry van and refrigerated sectors, while flatbed rates stay weaker. 

The decline in trucking rates over the past 18 months is the result of the reversal in surging consumer goods purchases that peaked in 2022. This surge also caused an expansion in the number of trucking firms, many of which were independent truckers. While many of these drivers have since rejoined larger trucking firms, the total number of firms is still 92,000 larger than it was before the pandemic, representing excess capacity in the long-distance market. Excess capacity in the less-than-truckload (LTL) market was removed with the bankruptcy of Yellow Corp. last year. 

The cost of ocean shipping from Asia has risen ahead of the normal peak season of June to September. China-to-West Coast container rates jumped by $3,000 per box in May as retail shippers ordered extra merchandise early, due to the continuing near-closure of the Red Sea and threats of tariffs on Chinese goods coming from both presidential candidates. 

President Biden recently announced increased tariffs on $18 billion of imports from China, and former President Trump countered with his own tough-on-China proposal. Biden’s policy raised the prospect of a new escalatory trade war, similar to what happened in 2018, if China responds with its own restrictions on U.S. goods. 

Prices of materials have eased a bit recently as questions remain about the strength of China’s growth. Commodity prices often rise and fall with reports on China’s economy, and China’s growth is slowing, so prices are not likely to rise much going forward. Steel prices have dropped between 10% and 25% this year, depending on the type. Copper is off its highs, but won’t fall much because of lower supply from Chile, a major copper exporter. Crude oil is likely to stay in the $70-$80/barrel range this summer. Lumber prices may rise a little when the Fed cuts interest rates, as high rates have dampened home building and renovations. 

Some qualified good news for electric vehicle battery makers: The prices of lithium and cobalt — two raw materials needed for EV batteries — are still quite low, because battery production has outpaced demand.

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