WFC Wells Fargo and Company

By Ezequiel Minaya, Tatyana Shumsky and Nina Trentmann 

Corporate finance leaders are worried that the good times won't last as an increasingly cloudy long-term economic outlook plays out against the backdrop of trade spats and geopolitical risk.

The passage of the U.S. tax overhaul eliminated significant uncertainty and strengthened earnings for many companies. Economic data from Washington to Beijing has been strong as global growth is estimated to climb to 3.9% this year, according to the International Monetary Fund. Capital spending by companies in the S&P 500 rose about 24% to $166 billion during the first three months of the year compared with 2017, according to Credit Suisse Group AG data.

"That's a very business friendly environment to be operating in, better than in the recent past," said John Shrewsberry, Wells Fargo & Co.'s finance chief.

Longer-term forecasts are less optimistic. The IMF warns that the boost from the U.S. tax cuts will fade beginning in 2019. Economists surveyed by The Wall Street Journal worry that a recession could begin in 2020 as the Federal Reserve raises interest rates.

Some CFOs say a downturn appears overdue, amid signs of tightening credit and labor markets. And the specters of trade tensions and political turmoil from Mexico to London to Washington are haunting even the rosiest of company outlooks.

The widely cited Global Economic Policy Uncertainty Index surged 64% between January and May, reaching its highest level in a year even as the capital spending boom got under way.

Nick Bloom, an economics professor at Stanford University and an author of the index, attributed the surge to U.S. President Donald Trump's tougher stance on trade, saying the leader "means business in introducing tariffs and pulling away" from the Group of Seven industrialized nations.

The White House is levying tariffs on tens of billions of dollars of Chinese goods starting in July, a move that is likely to spark retaliation from China. The Trump administration also is seeking to rewrite the North American Free Trade Agreement with Canada and Mexico.

The trade conflicts have given businesses pause, said Mark Zandi, chief economist at Moody's Analytics. He said companies are clearly increasing capital outlays, but he believes the investment growth would be greater without the trade tensions.

"I think that it is having an impact on investment decisions and hiring decisions," Mr. Zandi said. "Businesses are not pulling back. But they are not fully engaging. Investment spending growth is good. But I think it would be even stronger if not for this cloud created by these trade tensions."

The uncertainty surrounding tariffs and trade both in the U.S. and globally has forced Donald Allan, chief financial officer at tool maker Stanley Black & Decker Inc., to double the amount of time he spends on contingency planning.

"I'm spending at least 40% of my time on that type of stuff, if not more, " Mr. Allan said, adding that he frequently consults a variety of external experts from investment bankers to lobbyists to industry associations to get a range of perspectives.

The goal is to make sure "that we're effectively managing all of the risks but also making sure that we're not overreacting," Mr. Allan said.

For Verizon Communications Inc., the concern tied to trade friction was any possible impact it could have on the company's supply chain, said CFO Matthew Ellis. The scope of any disruption is likely to be limited as the telecommunications giant is focused on the U.S., though the company imports some networking equipment from overseas.

"You do your best to make sure you have contingency plans," he said. "You think through, 'Am I solely reliant on one particular supplier, one outcome?'"

Other companies also are bracing for a potential decline in economic sentiment. Discovery Inc., the New York-based media and TV company, plans to have money on hand now that it completed the acquisition of Scripps Networks Interactive Inc. in March. "The new Discovery is a free cash flow machine," CFO Gunnar Wiedenfels said Wednesday. He forecasts that cash left over from operations, including capital spending, will reach $2.3 billion this year.

"Having free cash flow in these times of uncertainty gives us a lot of flexibility," Mr. Wiedenfels said.

Mr. Trump's high-profile talks with North Korea, the unfolding impact of Britain's exit from the European Union, and turmoil in the Middle East and Venezuela, are among the additional geopolitical stresses demanding the attention of finance chiefs.

Amid this backdrop, according to Gregory Daco, chief U.S. economist at Oxford Economics, companies have the more predictable concern of an economy that is "fairly advanced in a business cycle."

CFOs are increasingly wary of rising costs associated with putting out a product or service -- such as labor, transportation and energy, he said.

"Until the dust settles, people just definitely have to stand back and wait for that to happen," said Wells Fargo's Mr. Shrewsberry.

Write to Ezequiel Minaya at ezequiel.minaya@wsj.com, Tatyana Shumsky at tatyana.shumsky@wsj.com and Nina Trentmann at Nina.Trentmann@wsj.com

(END) Dow Jones Newswires

June 17, 2018 05:44 ET (09:44 GMT)

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