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Economic Forecasts

7% Gain Likely in ’18 if Trade Strains Are Contained

Kiplinger's latest forecast on business equipment spending

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GDP 2.9% pace in ’18, up from 2.2% in ’17 More »
Jobs Unemployment rate will decline further More »
Interest rates 10-year T-notes at 3.2% by end ’18 More »
Inflation 2.5% in ’18, up from 2.1% in ’17 More »
Business spending Up 7% in ’18, boosted by expanded tax breaks More »
Energy Crude trading from $65 to $70 per barrel in December More »
Housing Price growth: 5.0% by end of ’18 More »
Retail sales Growing 5.1% in ’18 (excluding gas and autos) More »
Trade deficit Widening 5%-6% in ’18 More »

Businesses are cautiously boosting spending to expand production while they fret about the impact of a widening trade war. The Trump administration keeps upping the ante in its battle with China, slapping 10% tariffs on $200 billion more of Chinese imports on September 24, with the rate set to jump to 25% by year-end. That is in addition to $50 billion of imports from China that already were being penalized, and the White House is threatening to add another $267 billion of goods to the list. That would cover all the goods that the United States imports from China. In addition, steel and aluminum imports from nearly every country in the world now face 25% tariffs. The U.S. actions have provoked retaliatory tariffs not only from competitors like China but also from European allies, Canada and Mexico.

Some companies, including automaker Ford Motor Co., complain that the tariffs on imported metals raise costs and adversely affect profits. Other groups, like the U.S. Chamber of Commerce, which represents a broad swath of industries, also are protesting the Trump administration’s trade policy, warning that it carries the potential not only to hike costs but to damage overseas markets for U.S. exports. The latest round of American tariffs also covers many consumer goods, potentially leading to higher prices in U.S. stores.

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Tariffs have had only a limited impact so far on the vibrant U.S. economy, so a 7% increase in business spending is still anticipated. A strong U.S. dollar is mitigating the higher costs of imports, while the $1.5-trillion tax cut that kicked in at the beginning of this year included incentives for stepped-up investment spending. The drop in oil prices from mid-2014 through early 2016 that hit energy-sector investment is in the rearview mirror. Oil and gas exploration spending has been on a steady, if unspectacular, upward trend since 2016. A 7% pickup in business spending is moderate by historical terms but will top last year’s 5.3% gain, showing strength in the nation’s industrial sector.

There was a dip in demand during August for a key category of capital goods that is used as a proxy for business spending. Orders for nondefense goods excluding aircraft fell 0.5%, following two successive months of substantial gains. Nonetheless, over the first eight months of this year, orders are up 7.4% from the comparable period in 2017, while shipments of finished products are ahead by 7.5%. The decline in August orders was centered on motor vehicles, while orders for primary metals, electrical machinery and communications equipment rose from July levels. Moreover, there are big order backlogs for commercial aircraft that will keep that factory sector humming for years to come. And inventories of completed durable goods were down in August, which provides incentive for manufacturers to step up output to restock them.

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