US Businesses Continue to Invest Despite Recession Predictions And Economic Headwinds

Despite concerns from investors, economists, households, and individuals on the internet, the anticipated US recession has not yet come to fruition.

Main points from the report wrote by David Glaymon include:

• Business investment has grown by 3.5% over the last year, despite consensus forecasts predicting sharp declines during recessions.

• Weak business sentiment, banking stress, and falling office investment pose significant threats to capex growth in the future.

• Forward-looking survey measures of capital spending expectations have fallen to their lowest levels since the financial crisis.

• The Fed's H.8 release indicates that bank lending to businesses has stagnated in recent weeks.

• Office investment is likely to fall further due to an increase in office vacancy rates and declining oil and gas investments.

• Strong investment in domestic manufacturing will partly offset these headwinds.

• Goldman Sachs expects business fixed investment growth to slow from a +2% annualized growth rate in 2023H1 to a roughly +1% annualized rate in 2023H2 before rebounding to a +3% rate in 2024.

• GDP growth is expected to be 2.3%/1.1%/1.1% in 2023Q2-Q4.

• Goldman Sachs predicts 2023 GDP growth to be 2.0% on a full-year basis (vs. consensus of 1.3%) or 1.6% on a Q4/Q4 basis.

David indicates that despite some economic headwinds, equity markets have had a solid year, supported by better-than-expected earnings and expectations for an end to Fed tightening. However, there is a heightened risk of recession in the coming year, which could put pressure on profit estimates. Firms may also plan to rein in investment, with cuts potentially affecting manufacturing and mining sectors, but increasing investment in technology. Although equity performance has been driven by valuation expansion and lower interest rate expectations, slowing growth, and challenging earnings expectations create a difficult backdrop for equities. A defensive stance in equities, focusing on quality and cash flow generation, is recommended.