Companies are shelving investment plans as they await a cut in US interest rates

At the start of the year, U.S. businesses and consumers made big plans to buy equipment or homes, thinking interest rates would finally fall. Now everything is on hold and most sectors of the economy are set to slow for the foreseeable future.

A Michigan maker of cutting tools is deferring spending of up to US $1 million (S $1.35 million) on new equipment this year. An Atlanta woodworking machinery manufacturer says some customers are trying to extend the life of their equipment.

Inflation progress stalled earlier this year and Fed officials decided to hold interest rates at 23-year highs for longer, forcing businesses to rethink investments in capital spending, inventories and hiring. Policymakers are expected to leave borrowing costs unchanged again Wednesday after a two-day policy meeting.

For companies, the pain is in the data. S&p Global Market Intelligence expects capital investment in manufacturing to grow just 3.9 per cent this year, down from a January forecast of 6.7 per cent. Us corporate bankruptcy filings rose more than 40 per cent in the year to the end of March, while personal bankruptcies rose 15 per cent, according to the administrative Office of the US Courts.

According to a report released June 5 by the Institute for Supply Management (ISM), a majority of respondents in the service sector said inflation and current interest rates are holding back business conditions.

The Fed is also sowing uncertainty around the world by keeping interest rates higher for longer, while further squeezing debt-laden consumers and delaying home purchases.

Deferred equipment purchase

"With high interest rates, you definitely have to pull back the REINS," said Fullerton Tool Co., based in Michigan. CEO Patrick Curry. "We have to postpone some measures and make the best of what we have."

Fullerton, an 81-year-old company with two plants in Saginaw, Michigan, and one in California, makes cutting tools for aerospace, automotive and medical, among other fields. Curry said the company delayed spending about $1 million on equipment upgrades, and customers aren't buying as many devices.

ISM's economic forecast on May 15 showed that company leaders expect capital spending to grow just 1 percent this year, down from nearly 12 percent projected in December 2023.

Investors are pricing in about 1.5 rate cuts this year, putting the chances of the first cut in September at roughly 50%, according to futures market data.

Leigh Lytle, CEO of the Equipment Leasing and Finance Association, said in a press release that if the Federal Reserve starts cutting interest rates by then, business and software investment should pick up in the second half of the year.

Blair Chandler, manager of equipment finance and leasing for woodworking machinery maker SCM North America, said there is still demand for heavy-duty saws and drilling machines used to make cabinets and furniture.

Chandler said that while large customers are continuing to buy, smaller customers are working to extend the life of older equipment.