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Economic Forecasts

Businesses Curb Spending Growth in 2019

Kiplinger’s latest forecast on business equipment spending

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GDP 2.5% growth in '19, down from 2.9% in '18 More »
Jobs Unemployment rate will decline to 3.4% by end '19 More »
Interest rates 10-year T-notes at 3.0% by end ’19 More »
Inflation 2.2% in ’19, up from 1.9% in ’18 More »
Business spending Up 5% in ’19 as global growth slows More »
Energy Crude trading from $55 to $60 per barrel in June More »
Housing 5.35 million existing-home sales in ’19, down 0.4% More »
Retail sales Growing 4% in ’19 (excluding gas and autos) More »
Trade deficit Widening 7%-8% in ’19 More »

Worries that economic growth will slow in 2019 is keeping American businesses from widely expanding their operations. There are plenty of reasons for caution. Chinese economic growth is slowing, so it may lose some appetite for U.S. goods and commodities while another top export market, Europe, faces not only slowing growth, but uncertainty about how Britain will leave the European Union. A split from the EU in March without a deal on how to manage future relations would be a drag on both sides’ growth.

Meantime, the Trump administration is negotiating with Beijing on measures to extend a truce in their tit-for-tat tariff battle. But there’s no guarantee that talks will produce an agreement. Failure could lead to a full-blown trade war erupting in March. The U.S. is pressuring China to change its ways, including forcing foreign companies to turn over of trade secrets as a condition of doing business in China. Beijing maintains the charges are unwarranted and that U.S. actions against it are unfair. The United States has so far levied tariffs on $250 billion worth of Chinese exports to the U.S. and threatened to tax another $267 billion, which would cover virtually everything that China sends to the U.S. Uncertainty over trade policy involves more than just U.S. dealings with China, however, since Washington also has levied 25% tariffs on steel and 10% tariffs on aluminum imports on even allies Canada, Mexico and the EU, each of which has retaliated. So, U.S. companies face higher costs for many of the products they import and use in manufacturing processes, like steel and aluminum, and a reduced competitive position when they export if they price their goods to recover the higher costs.

Growing headwinds faced by U.S. manufacturers will slow growth in capital spending in 2019 to 5% from 7% this year. Though the U.S. economy has maintained most of its strength, overall growth will throttle back to 2.7% next year from 2.9% this year while global expansion eases as big markets in China and Europe soften. Capital spending surged in the first half of 2018 after corporate taxes were slashed and the clock started ticking on limited incentives for capital investment. But that stimulus faded rapidly, overshadowed by concerns about U.S.-China tensions and worry that the recovery from the 2007-2009 recession has grown so long in the tooth that weakening, even a downturn, seems inevitable.

A key business-investment gauge declined in November for the third time in four months, underlining the pullback in spending at the end of the year. Orders and shipments of finished goods dropped from October. Aircraft orders were an exception in November as demand rose for both military and commercial planes. But otherwise, orders fell for a wide range of American-made goods including machinery, electrical equipment and motor vehicles. U.S. manufacturers face an additional handicap from the strengthening U.S. dollar, which is appreciating as other major currencies soften. The problem is that a heartier greenback amounts to an additional burden for U.S. producers because it simultaneously makes imports cheaper and U.S. exports more expensive.

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