GDP Still on Track for Solid Rise in 2018


Kiplinger's latest forecast for the GDP growth rate

GDP 3.0% pace in '18, up from 2.3% in '17 More »
Jobs Slower job gains likely this year as labor market tightens 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 $60 to $65 per barrel in June More »
Housing Price growth: 5.0% by end of '18 More »
Retail sales Growing 4.2% in '18 (excluding gas and autos) More »
Trade deficit Widening 5%-6% in '18 More »

GDP should solidly bump up to 3.0% in 2018, after 2017’s 2.3% pace. Tax cuts will boost GDP through rising consumer spending and stronger business investment. Rising household income, job gains (albeit smaller than before) and credit utilization are also underpinning consumer spending. Housing construction should pound ahead. Manufacturers will benefit from stronger exports as the global economy improves. However, auto sales will downshift (though they haven’t yet). The biggest risk to growth would be the effects of a minor trade war: While any slowdown in international trade would likely be small, the uncertainties created could ding business investment.

In the first quarter, business spending likely contributed more to growth than consumer spending, because businesses have reacted to their tax cuts faster than consumers have. First-quarter growth is likely to be the slowest of the year and should come in at about 2.3%.

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Fourth-quarter growth in 2017 of 2.9% is stronger than it looks. Consumers, businesses and even government picked up the spending pace. Consumers spent heavily in nearly all categories. The flip side of strong consumer spending was a big jump in imports, which detracted from overall growth. Housing made a turnaround in the fourth quarter, and business equipment purchases grew a little faster. An unexplained drop in business inventories prevented the headline number from being much higher.

Tax cuts for both businesses and individuals should goose the economy going forward, but likely not as much as President Trump would like. Improving business profitability should generate business investment, but some of the bigger profits will go toward stock buybacks and shareholder returns. Increased wealth and burgeoning home values will encourage some extra consumer spending, though recent uncertainties in the stock market could induce some caution. Tax cuts for individuals will help, but wealthier taxpayers, who tend to save more, will benefit the most.

Look for the Federal Reserve to hike interest rates twice more this year, in June and December. The number of board members who favor rate hikes has increased this year relative to those who do not.

See Also: The Trump Effect on Financial Markets

Source: Department of Commerce: GDP Data