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Economic Forecasts

Business Spending Prospects Brighten after Lengthy Slump

Kiplinger's latest forecast on business equipment spending

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A pickup in global economic activity plus a stabilized energy sector are supporting a gradual strengthening in U.S. manufacturing activity and investment. Spending on costly and long-lasting durable goods, electrical equipment, appliances and components is firming up. Businesses could also eventually get a boost from the Trump administration’s plan to lower the corporate income tax rate. Trump’s tax proposal comes on top of a broad-based initiative to reduce the red tape and regulations that industry must comply with.

Business investment will likely rise by 3% to 4% this year: Only a modest gain by historical standards but a big improvement after two years of little or no increase. Energy services firm Baker Hughes says close to 700 oil rigs are now back at work – the most in two years – because of higher oil prices. The energy sector provides an important underpinning for manufacturing, since the industry uses so much equipment, such as pumps, valves and drilling gear, that is made in America. What’s more, the International Monetary Fund now sees a broad-based pickup in global economic expansion to 3.5% this year from 3.1% in 2016, with a further advance to 3.6% in 2018 that should boost business for U.S. exporters.

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New orders for nonmilitary equipment excluding aircraft, a proxy for business spending, edged up 0.2% in March. While the increase was smaller than expected, overall order volume in this year’s first quarter is running 3.4% above levels in the comparable period last year. Also, shipments of finished goods posted a second straight monthly gain in March, implying an accelerating pace for business spending in the early months of 2017. The improvement for manufacturing and investment will be gradual, though, partly because there is still some inventory to be drawn down in sectors such as the auto industry, whose sales are less robust than last year. Slower growth in household spending is a challenge at home, while the dollar’s value remains elevated against many other currencies, inflating the prices of American-made goods in foreign markets. Despite those headwinds, the manufacturing sector is on a positive path, headed for moderate growth in 2017 after two years in which durable goods production went nowhere.

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