Approaching the middle of 2019, it seems natural to take stock of how the economy, the markets and corporate sentiment are faring. Across North America, policy gyrations and economic metrics appear highly contradictory and disruptive.
Overall, the US and Canadian economies are growing, unemployment is at historic lows, wages are rising, and, among US firms, roughly 75% of companies beat first-quarter earnings expectations. Concerns are growing, however, that the economy is beginning to stall, and US tariff policies are putting growth and investment at risk.
Housing starts are slowing, retail spending is falling, new credit applications are dropping, and banks are tightening standards on commercial and industrial loans, for example. Ongoing and rising uncertainty around tariffs and trade is creating a negative mood, together with indecision on domestic investment and FDI.
It would appear that US president Donald Trump views short-term disruption as “noise” in the system but also beneficial to the longer term objective of driving more investment into the US. The apparent theory is that by making investment in Canada, Mexico, the EU or China (or anywhere else) more uncertain, the potential ought to increase for better trade terms and more FDI to arrive in the US. However, it is unclear how long it will take to see if the gambit works, or if the administration will be given sufficient time to try it.
A first quarter 2019 report by PwC showed that North American corporate leader optimism in economic growth had dropped from 63% in 2018 to just 37%. Another study, from Ohio State University, shows business forces leaning strongly against current policy.
The study reviewed the US Federal Reserve’s 'Beige Book' commentaries on economic conditions from January 2019. When asked about the impact of trade actions, the vast majority of 493 US companies reported some degree of harm. In fact, companies who claimed 'very negative' effects outnumbered those who claimed 'very positive' effects by 14 to 1.
If tariffs are the short-term policy pain leading to long-term investment gain, business opinion seems to be more concerned than motivated.
Decisions to locate or relocate operations from one country to another and then implement the strategy typically take anywhere from one to four years, depending on the type and scale of facility. Due to the unpredictability of tariff regimes and rising concerns about recession, many companies will hesitate to make new investments in the US until order and certainty returns – and that could be years away.
Gregg Wassmansdorf is senior managing director, consulting, at Newmark Knight Frank, a global real estate services firm. He is a member of the Site Selectors Guild. E-mail: firstname.lastname@example.org