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Economic Forecasts

7% Gain Likely in ’18 if Trade Strains Ease

Kiplinger's latest forecast on business equipment spending

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GDP 2.9% pace in '18, up from 2.3% in '17 More »
Jobs A tight labor market will make hiring more difficult More »
Interest rates 10-year T-notes at 3.3% by end '18 More »
Inflation 2.6% in '18, up from 2.1% in '17 More »
Business spending Up 7% in '18, boosted by expanded tax breaks More »
Energy Crude trading from $65 to $70 per barrel in July More »
Housing Price growth: 5.0% by end of '18 More »
Retail sales Growing 4.9% in '18 (excluding gas and autos) More »
Trade deficit Widening 5%-6% in '18 More »

Business investment is improving despite uncertainty caused by President Trump’s aggressive trade policies. Washington is brandishing threats of tariffs not only at China over its huge trade surpluses with America but also at imported cars (including those made by Germany and other allies). That is keeping concerns about a trade war simmering. The Trump administration’s latest move may be a targeted strategy to wring concessions from Mexico and Canada, with whom the United States is trying to renegotiate a free-trade agreement. Nonetheless, the net effect is globally ramped-up ill will and warnings of damaging countertariffs.

Assuming tensions abate, we look for a 7% rise in core business fixed investment this year. That is a modest gain by historical standards but builds on last year’s 5.3% pickup, which owed much to the greatly reduced corporate tax rate, healthy corporate earnings and a global upswing in demand since mid-2016. The Republican-led U.S. government hopes that slashing corporate tax to 21% from 35% incentivizes businesses to invest, spurring a surge in big-ticket spending aimed at expanding export opportunities.

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There is a measurable pickup in spending, but not a boom. A key indicator that serves as a proxy for overall business investment — durable goods other than aircraft — climbed 1% in April. That is a solid gain, though it came after a 0.9% drop in March. Shipments of finished goods also rose in April after being weak in March. During the first four months, orders of core capital goods increased by 6.6% from the comparable period last year, establishing an upward trend. The major potential hurdle is whether the Trump administration’s tough approach with both allies and adversaries significantly hardens the world’s trade terms for the United States. The European Union, Japan and China are irritated with the United States and will retaliate if Trump makes good on his threats.

A range of industries exhibited spending strength in April. Orders for motor vehicles and parts posted their best increase in eight months, up 1.8%. Computers and communications equipment, fabricated and primary metals, and electrical equipment each grew 1% from March. Some traditionally big capital equipment spenders, such as the oil and gas exploration and development sector, are in good shape, thanks to strong oil prices. That boosts factories that supply the sector, such as drilling equipment makers, and pipeline and truck manufacturers. Orders for new commercial aircraft weakened in April. But they are up by 51% in the first four months of 2018 from comparable 2017 levels, and backlogs are years long at Boeing factories.

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