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Economic Forecasts

Modest Rise for Business Spending in 2016

GDP 1.8% growth for the year, down from 2.4% in '15 More »
Jobs Hiring slowing to 150,000/month by end '16 More »
Interest rates 10-year T-notes at 1.4% by end '16 More »
Inflation 1.8% for '16, up from 2.4% in '17 More »
Business spending 4% gain in '16, after drop in '15 More »
Energy Crude oil trading from $40 to $45 per barrel in Sept. More »
Housing Prices up 5% on average in major metro areas More »
Retail sales 4% growth in '16, compared with 4.8% in '15 (excluding gas) More »
Trade deficit Widening 4% in '16, after a 6.2% increase in '15 More »

U.S. businesses were pulling back on new equipment purchases even before Britain voted to quit the European Union and corporate caution will intensify now that a British exit has been decided. That’s more bad news for the nation’s manufacturing sector because companies will hold down investment plans while they assess the impact on U.S. and global growth from political turmoil in Europe. The dollar’s value is expected to keep rising, too, as investors seek safe haven for their money, further raising the hurdles for businesses that export since their products will become more expensive in foreign markets.

See Also: All Our Economic Outlooks

Key overseas economies like China are slowing, while others, including Brazil, are in recession. With the big European trading bloc now bracing for months of uncertainty as Britain negotiates its exit from the EU, even more potential for exports is likely to drain away. Even pre-Brexit, May figures for durable goods spending were not encouraging: Orders for non-defense capital goods excluding aircraft, a proxy for business investment, slipped 0.7% from April and were 3.5% lower during the first five months of the year than during the comparable period a year earlier. About the only equipment categories reflecting increased demand were commercial aircraft and communications equipment. Orders for new cars and trucks, electrical gear and primary metals weakened.

Some modest refurbishing of existing factories and normal replacement of equipment provides support. U.S. GDP continues to grow, albeit at a slower rate than forecasts called for before the Brexit vote. The world’s No. 2 economy, China, also is still expanding though more slowly than in the past. We continue to anticipate a modest 4% gain in new equipment purchases for the full year 2016, partly on the assumption that inventories that were overbuilt late last year and earlier this year will be drawn down enough to warrant investment in increased output. Note that a 4% gain in nominal spending is relatively slight compared with periods in the past before the Great Recession when double-digit annual gains were common.


Federal Reserve Chair Janet Yellen has noted that soft business spending since the recession is not surprising. The workforce is growing more slowly and sales are less than robust so companies don’t need to spend a lot on new equipment to satisfy demand. But it is a worry for the Fed because productivity, or output per worker, already is lagging and reduced investment over time in modern machinery and computers will only make the problem worse.

See Also: Small-Business Success Story: Spicing Up an American Classic


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