Rise in U.S. borrowing rates pose headwind to capital investments, likely to weigh on equipment spending: Wells Fargo Securities

The recent rise in borrowing costs in the United States pose serious headwinds to capital investments and is likely to weigh on equipment spending as well, a recent research report by Wells Fargo Securities found.

After rising at a double-digit pace in the second half of 2017, equipment spending looks to have cooled in the first quarter of this year. The slowdown may lead to some concerns that higher interest rates are beginning to take a bite out of what was an impressive run for equipment spending last year.

On the contrary, the Federal Reserve’s tightening stance has hardly been a death knell for business spending. Equipment spending has actually strengthened since the Fed began raising rates in late 2015 and, in previous cycles, remained buoyant as interest rates rose.

Financial conditions also remain supportive of business spending. The Fed’s Senior Loan Officer Opinion Survey shows banks on net easing business lending standards over the past year, while the Chicago Fed’s National Financial Conditions Index indicates conditions are easier today than when the Fed began normalization in 2015.

Meanwhile, higher interest rates will hurt at the margin, and the initial rebound in commodity-related investment following the partial recovery in prices is beginning to fade. At the same time, capital spending plans have wobbled in April as the initial euphoria regarding the tax plan has faded and trade-war concerns have grown.

"We anticipate the tailwinds to win out over the headwinds, but for equipment spending to moderate to around a six percent pace later this year," the report added.

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