Business Spending Forecast

Economic Forecasts

Cautious Outlook but 5% Gain Seen for ’19

Kiplinger’s latest forecast on business equipment spending

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GDP 2.6% growth in '19 More »
Jobs Job gains about 160,000 per month in '19 More »
Interest rates 10-year T-notes at 2.8% by end ’19 More »
Inflation 2.0% in ’19, up from 1.9% in ’18 More »
Business spending Up 5% in ’19 as global growth slows More »
Energy Crude trading from $60 to $65 per barrel in August More »
Housing 5.35 million existing-home sales in ’19, up 0.2% More »
Retail sales Growing 4.3% in ’19 (excluding gas and autos) More »
Trade deficit Widening 7%-8% in ’19 More »

Businesses are becoming cautious about investing because of an escalating trade war and inventory surpluses. Tensions between the United States and China were high before President Trump hiked tariffs to 25% on roughly $200 billion of goods coming in from China. The new penalties take effect June 1, bringing volatility to financial markets that could slow manufacturing momentum. U.S. exports to China of agricultural commodities such as soybeans have already taken a crushing blow. Now the widening trade conflict could spread to more goods, including manufactured products. The broader global economy also is weakening. The European Union is notably under strain as key economies such as Germany face softening export demand, while the common market copes with uncertainty over how, when or even if Britain will actually quit the EU as planned. Prime Minister Theresa May’s resignation removes what little certainty remained.

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A deal on trade between the United States and China is not out of the question and would help lift global economic spirits. But it will not happen quickly. The Trump administration is threatening even more tariffs. And it insists that it wants a comprehensive agreement that makes China change its ways and accept enforceable standards for respecting U.S. copyrights and intellectual property, among other measures. Beijing says that Washington’s demands aim to restrain its economic development. On a more positive note, there is some progress toward putting into practice a renegotiated North American Free Trade Agreement, popularly dubbed NAFTA 2.0. The U.S.’s continental neighbors would almost certainly ratify the new agreement, but ratification by the U.S. Congress is not guaranteed. Democrats are uneasy with the treaty’s provisions on labor and environmental protections. The Trump administration lifted tariffs on steel and aluminum exports from Canada and Mexico, which reciprocated by ending their retaliatory penalties on American products.

We expect a slim 5% rise in 2019 capital spending, down from last year’s 6% gain. That is very modest, compared with past decades, when double-digit increases were common. Manufacturers face headwinds at home and abroad. In particular, aircraft exports, which keep lots of factories humming because of the extended supply line they require, are encountering major gusts. It’s unclear when Boeing’s 737 Max airliner, which was involved in two fatal crashes, will receive regulators’ OK to fly again. That should reverse the slump in production and deliveries, and boost capital spending.

A key measure of business investment intentions took a hit in April. Orders for nondefense capital goods excluding aircraft — widely seen as a proxy for business spending — dropped by 0.9%, the first tumble in four months, after a slight 0.3% gain in March. The order weakness was especially apparent for motor vehicles and parts but also for primary metals, computers and electronics. Some of the softness likely was related to stockpiling that was evident in the first three months of this year and that now is being drawn down. Not every category of durable good was weak, either: Orders rose for fabricated metal products and machinery, as well as electrical equipment and appliances. So far this year, orders are up by 2.6% from the comparable period in 2018, while shipments of finished items are running 3.6% ahead of last year’s pace, reinforcing chances that a hoped-for recovery in aircraft business later this year will bump the business spending pace up to a 5% year-over-year gain.


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