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Economic Forecasts

Business Investment Slowly Gains Strength

Kiplinger's latest forecast on business equipment spending

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Business spending will close the year with good momentum, helped by an improving world economy and a cheaper U.S. dollar. Despite a blip downward in new orders during October, manufacturing industries continue to be on a 14-month expansion roll. That puts the industrial sector on track for more investment outlays in 2018. A 3%-4% increase in core business spending is in the works for both this year and next, possibly a little better if Republicans can overhaul the nation’s tax system.

Those increases are modest compared with the early 2000s, when spending on plant expansions and equipment often jumped at double-digit rates. But they’re a positive note when contrasted with the flat performances of 2015 and 2016. If the GOP slashes corporate tax rates, the cuts could spur spending at home. They would also make it less costly to repatriate some of the trillion dollars of profits now stashed overseas to avoid taxation.

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Core capital goods orders, a category including nondefense items and excluding aircraft, slipped 0.5% in October. That was surprising after three straight months of gains. However, it followed an upward revision in September orders, implying brisk business spending plans at the start of the fourth quarter. Year-over-year, these orders, which are closely watched as a proxy for spending plans, are up 4.4%. Shipments of finished nondefense capital goods edged up 0.4% in October, ahead 4% from 2016 levels.

Stabilizing energy prices are driving oil and gas drilling, which is contributing to healthier business investment. Orders for machinery were up in October, as were orders for computers, communications gear and electrical equipment. Demand for new cars and trucks climbed strongly as automakers benefited from consumers’ replacing vehicles lost in the floods of hurricanes Harvey, Irma and Maria. But orders for both military and civilian aircraft dipped at double-digit rates from September — not entirely surprising, because orders tend to come in sporadic, big-dollar batches.

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