January 28, 2019

Breakingviews: U.S. corporate borrowing slump is a bearish signal

by Breakingviews.

American companies are issuing much less debt so far in 2019. While higher earnings thanks to lower taxes are part of the explanation, another is cuts in planned investments. That’s how a trade war and political dysfunction can throttle the economy.

Companies sold a little over $1.3 trillion in bonds last year, a decline of more than $300 billion from 2017 and the lowest level in seven years. Investment-grade borrowings were down nearly 16 percent while high-yield offerings plunged by more than 40 percent. On top of that, overall issuance is down nearly a third year-to-date in 2019 compared with the same period a year earlier.

That isn’t all bad. Non-financial U.S. companies have taken advantage of historically low rates since the financial crisis to boost their collective debt to a record 74 percent of GDP at the end of 2017 according to the Bank for International Settlements, so a breather is in order.

In addition, the 2018 tax cuts have swelled corporate coffers, reducing the need to borrow. Analysts expect S&P 500 Index earnings to rise by 23 percent for the full year, the best showing since 2010, according to I/B/E/S data from Refinitiv. Early fourth-quarter reports have been solid with American Airlines and Southwest Airlines, for example, both reporting better-than-expected earnings on Thursday despite headwinds from the federal government shutdown.

S&P 500 earnings are, however, projected to grow less than 3 percent in the first half of this year. In theory, companies would pile on debt to finance investment if they expected robust economic growth. But Moody’s Investors Service forecasts borrowing will tick up by just 3 percent in 2019.

Animal spirits have been damped by the trade standoff between President Donald Trump’s administration and China and by the nearly month-old partial shutdown. The Conference Board’s measure of CEO confidence plumbed a six-year low in the fourth quarter of 2018. The ISM index of new manufacturing orders fell in December, and analysts at Bank of America Merrill Lynch expect last year’s capital-spending boomlet to peter out in the first half of 2019.

Subdued corporate borrowing should help keep interest rates down, one key Trump objective. But overall the slump in issuance is a bearish signal.

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