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Economic Forecasts

Business Spending Set to Shake Off Lengthy Slump

Kiplinger's latest forecast on business equipment spending


GDP 2.1% pace in '17, 2.4% in '18 More »
Jobs Hiring pace should slow to 175K/month by end '17 More »
Interest rates 10-year T-notes at 2.4% by end '17 More »
Inflation 1.3% in '17, down from 2.1% in '16 More »
Business spending Rising 3%-4% in '17, after flat '16 More »
Energy Crude trading from $40 to $45 per barrel in September More »
Housing 5.5% price growth by end of '17 More »
Retail sales Growing 3.5% in '17 (excluding gas) More »
Trade deficit Widening 4% in '17, after nearly flat '16 More »

Modestly improving global growth and a strong housing market will provide support for a gradual pickup in U.S. manufacturing activity and investment. It’s far from a boom, but the manufacturing sector has gained traction over the past year, as capital spending on costly, long-lasting durable goods from machinery to computers has rebounded after a weak stretch in 2015 and 2016. The month-to-month pattern of improvement is uneven, reflecting a surge of optimism that followed last November’s presidential election, followed by the realization that big infrastructure projects and tax reform will take time to achieve, if they happen at all. But Trump administration initiatives that cut regulations and called for more production in the United States have helped lift corporate spirits.

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A pickup in domestic energy production is another driver for increased investment. Energy services firm Baker Hughes reports 941 oil and gas drilling rigs now operating in the United States, more than twice the number from a year ago. Exploration and development is an important driver for manufacturing because of the energy industry’s need for machinery, pumps, valves, drilling gear and pipeline that are made in U.S. factories. For the full year 2017, we expect a 3% to 4% increase in total business spending: well below the double-digit growth of several years ago, but enough to signal a healing manufacturing sector. There will also be a little boost from higher exports, a reflection of both stronger economic growth overseas and an easing in the dollar’s pace of appreciation. The strengthening dollar had been a drag on sales to foreign markets earlier this year.

New orders in May for nonmilitary equipment excluding aircraft, a proxy for business investment, dropped 0.2%, as did shipments of finished goods. A cooldown in new-car sales is having an impact and is likely to continue over the summer months, as auto plants extend vacation changeover schedules to cut down on excess inventories. Nonetheless, so far this year, both orders and shipments are ahead of 2016 levels. In addition, measures of industrial activity from the Federal Reserve and the Institute for Supply Management showed a pickup in manufacturing activity in May. That increase supports the idea that while factories are not roaring ahead, they are at least maintaining the momentum gained at the beginning of this year, following two years of weakness.

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