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Economic Forecasts

Tax Changes Boost Business Spending

Kiplinger's latest forecast on business equipment spending

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GDP 3.0% pace in '18, up from 2.3% in '17 More »
Jobs Unemployment rate down to 3.8% by end '18 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 $55 to $60 per barrel in April More »
Housing Existing-home sales up 1.6%, new-home sales up 9.8% in '18 More »
Retail sales Growing 4.6% in '18 (excluding gas) More »
Trade deficit Widening 5%-6% in '18 More »

Strengthening growth overseas, coupled with newly expanded U.S. tax breaks for companies that invest at home, will significantly lift business spending in 2018 after a relatively strong performance last year. A resurgent energy industry and healthy job market are providing support for the nation’s manufacturing sector, which has been gaining in tempo since roughly the middle of last year. As a result, about a 7% increase in core business fixed-investment spending now is in the cards for this year, on top of a modestly-better-than-expected 5.3% gain for all of 2017.

Those increases are modest by past standards, when plant and equipment spending used to jump by double digits, but it’s a vast improvement over the near stagnation that followed the Great Recession. Reasons to be optimistic about spending in 2018: A rewritten U.S. tax code that cuts corporate tax rates to 21% from 35%, and provides new investment incentives, including full depreciation for qualifying assets put into service from Sept. 27, 2017 through 2022. The new law has triggered a flood of announcements from companies such as AT&T, Boeing and Comcast about new investments, increased bonuses or other compensation to employees, or both. In either case, the moves reinforce business activity because consumers have more to spend and companies have more reasons to expand production.

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Orders of core capital goods, a category that excludes aircraft and military goods and is seen as a proxy for investment plans, slipped by 0.3% in December. Despite closing 2017 on a soft note, orders were up 5.3% for the year, topping expectations for a 4% increase. Another gauge of factory vigor, shipments of finished products, were up 0.6% in December and ahead 4.9% for the year, reinforcing that manufacturing is humming as 2018 kicks off.

Stabilization in gas and oil prices is spurring drilling, a positive for energy sector investment and proof that the industry is recovering. During December, orders for fabricated and primary metals picked up, as did automobile and commercial airplane requests. Computers and communications equipment orders softened from November, but machinery demand was up.

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