U.S. Capital Goods Orders Stall Amid Trade Uncertainty, Fed Reports

In March, U.S. factories experienced a near standstill in orders for capital goods, indicating a growing caution among businesses due to uncertainties surrounding tariffs and tax policies. The U.S. Commerce Department reported that the value of core capital goods orders, excluding defense and aircraft, increased by only 0.1% from the previous month, with a revised decrease of 0.3% in February. This stagnation underscores the impact of trade tensions and policy uncertainties on business investment decisions.

The slowdown in capital goods orders is a clear indication that businesses are adopting a wait-and-see approach, hesitant to commit to large investments until there is more clarity on trade policies and potential changes in tax laws. This cautious stance is likely to persist as long as these uncertainties remain, potentially leading to a further slowdown in economic growth if businesses continue to delay investments.

The situation highlights the broader economic implications of trade policy uncertainties. Businesses are increasingly wary of making long-term investments, which are crucial for economic growth and job creation. The lack of clarity on tariffs and tax policies is creating a ripple effect, with businesses holding back on spending and investment, which in turn can lead to reduced economic activity and slower job growth.

The current environment of uncertainty is not conducive to robust economic expansion. Businesses need a stable policy framework to make informed decisions about capital expenditures. Until there is greater clarity on trade and tax policies, the economy may continue to face headwinds, with businesses remaining cautious and investment levels stagnant.

The Federal Reserve's latest Beige Book report, released on March 23, indicated that economic activity has remained largely unchanged since the previous report, but there is widespread uncertainty surrounding international trade policies. The report mentioned the term "tariffs" 107 times, more than double the number in the previous report, and related expressions of "uncertainty" appeared 89 times. The report suggested that as economic uncertainty increases, particularly around tariffs, the outlook for multiple regions has significantly worsened.

The impact of the Trump administration's comprehensive tariff policies, aimed at reshaping global trade, has been substantial. These tariffs, applied broadly and on a large scale to almost all trading partners, have significantly affected the U.S. economy. On one hand, tariffs have driven up prices for imported goods, leading to consumer stockpiling. On the other hand, the increased import tariffs have boosted domestic demand, significantly impacting related industries and U.S. production. Together, these factors are exerting downward pressure on the U.S. economy's total demand.

Tariffs have pushed up U.S. inflation while simultaneously suppressing overall economic demand. This situation forces the U.S. economy to balance between inflation and growth or employment, increasing the risk of stagflation. Recently, President Trump and the Federal Reserve have been at odds over whether interest rates should be lowered. While Trump has stated that he has no intention of firing Federal Reserve Chairman Powell, he has expressed a desire for Powell to take more aggressive action on interest rates.

Trump's push for lower interest rates is driven by two main reasons. First, as a businessman, he is sensitive to the cost of interest rates. However, under the current legal framework, Trump lacks the authority to directly fire the Federal Reserve chairman. Therefore, he has resorted to his typical approach of extreme pressure to persuade Powell to lower interest rates. Second, with the U.S. national debt now exceeding $36.2 trillion and significant debt maturities this year, lowering interest rates would allow the U.S. government to "borrow new debt to pay off old debt" at lower rates, significantly reducing costs. Additionally, lower interest rates typically lead to a depreciation of the U.S. dollar, which can benefit U.S. manufacturing and exports.