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Economic Forecasts

Business Spending Set to Shake Off Lengthy Slump

Kiplinger's latest forecast on business equipment spending

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A revived energy sector, strong housing market and expanding global economy are providing support for a modest pickup in U.S. manufacturing activity and investment. Capital spending on costly and long-lasting durable goods, from machinery to computers and new airplanes, accelerated strongly in the opening months of 2017. The month-to-month pattern of new orders and shipments will likely be uneven over the course of the year, but there are promising indications that businesses are responding to the Trump administration’s initiatives to cut regulations and red tape and to work toward reducing corporate income taxes.

A rebound in domestic energy production is a major driver in the investment pickup. After peaking in October 2014, the U.S. oil rig count slumped sharply as world oil prices fell that year. But according to energy services firm Baker Hughes, the rig count has been moving higher since last summer. Energy exploration and development are significant contributors to U.S. manufacturing because of the demand they generate for made-in-America equipment, from pumps and valves to drilling gear and pipes. Overall, we look for a 3% to 4% rise in all types of business investment in 2017, soft by historical standards but a nice bounce after two straight years of little or no increase. There is also less drag on exports of manufactured goods from a strong dollar now that the buck’s value has declined a bit, and excess inventories are less of a problem. So the key to getting factories humming again is a pickup in demand.

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New orders for nonmilitary equipment excluding aircraft, a proxy for business investment, were flat for a second consecutive month in April. Some categories that regularly swing wildly from month to month, such as aircraft orders, dropped in April. But other sectors also retrenched, including primary and fabricated metals, machinery and electrical equipment. Shipments of finished goods edged up in April, a sign that factories remain busy enough to keep their workforces fully engaged, so the softness in monthly orders isn’t setting off alarm bells. Manufacturing is out of the slump it was in for much of the past two years, not only in the United States but globally, and now awaits an anticipated pickup in second-half demand to add steam.

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