U.S. Firms Say Sales Outlook, Not Taxes, to Drive Spending

(Bloomberg) -- U.S. companies expect their investment and hiring to grow at a slower pace in 2018, and only a small share say proposed tax legislation is driving their capital-spending decisions, according to a private survey.

The Institute for Supply Management’s semi-annual forecast showed factory purchasing managers see capital spending rising 2.7 percent in 2018, slower than the 8.7 percent gain reported for this year. Their counterparts at service providers project investment growth of 3.8 percent, also weaker than this year’s 7 percent advance. Less than half of respondents in both manufacturing and services said they’d raised wages to attract workers.

The survey, conducted in November, suggests that the economy will get less of a boost from business investment next year after strong capital spending helped push the pace of growth above 3 percent in the past two quarters. The findings also show companies are awaiting clarity about the proposed reduction in corporate taxes moving through Congress that the Trump administration and Republicans say will result in a sustained increase in the rate of expansion.

Were the tax plan to get passed and implemented, companies may adjust their 2018 investment projections, Anthony Nieves, chairman of the ISM non-manufacturing survey, said in a phone interview. For now, “no company is going to forecast based on hypothetical” tax benefits, he said.

The Tempe, Arizona-based ISM also issues the separate monthly surveys with purchasing managers’ indexes for manufacturing and service providers. The semi-annual forecast is based on a similar survey panel.

Business Outlook

Respondents to a special question in the semiannual poll showed companies were giving less importance to prospects for tax reform or an overhaul of regulations when it came to capital spending. When asked what was behind their investment plans for the next 12 months, about two-thirds in each group of manufacturers and service providers cited the general business outlook, while less than 6 percent attributed it to business tax reform.

At a Nov. 14 speech to the Wall Street Journal CEO Council by Trump’s top economic adviser, Gary Cohn, the moderator asked business leaders in the audience for a show of hands if they planned to increase capital investment should the tax plan become law. Few people responded. “Why aren’t the other hands up?” Cohn asked.

Tax Implications

Timothy Fiore, chairman of the ISM manufacturing survey committee, said the results don’t reflect any kind of tax implications, as the proposal hadn’t yet gained much velocity among lawmakers when the survey closed in late November. Businesses will probably wait for more clarity and certainty, he said in the same phone interview as Nieves.

“Nobody’s going to figure a tremendous tax benefit here until it at least gets to the signatory stage,” Fiore said, referring to the legislation in Congress. “Even at this point, it’s not a sure thing.”

Economic growth is expected to continue, according to the semi-annual survey. Purchasing managers in manufacturing anticipate sales will rise 5.1 percent next year, and service providers see revenue gains of 6 percent. That’s in line with other recent reports indicating business sentiment remains elevated.

Companies will continue to boost headcounts next year, though at a slower pace, the survey also showed. Manufacturing will see employment growth of 1.2 percent in 2018, following a 2.3 percent gain reported for this year since December 2016. Service businesses project a 1.5 percent increase in hiring after a 2.4 percent gain in 2017. Both groups predict labor and benefits costs will increase next year, with a 2.1 percent advance for manufacturing and 2.6 percent for services.

When asked whether companies had raised wages to recruit new people, 53 percent of responses in the manufacturing panel said no, while 44 percent answered yes. Among service providers, 57 percent of respondents said they hadn’t lifted worker pay when hiring, while 37 percent said they had, according to the survey.

While factory purchasing managers forecast prices will rise 1.8 percent in 2018 on average and service businesses expect price growth of 2.2 percent, both groups anticipate their profit margins will expand next year.

©2017 Bloomberg L.P.