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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 2.3% in '17 More »
Jobs Unemployment rate will decline further More »
Interest rates 10-year T-notes at 3.3% by end '18 More »
Inflation 2.4% 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 $60 to $65 per barrel in October 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 »

Business investment momentum remained firm through the first half of the year, despite buffeting from the White House’s aggressive trade policies. The United States has imposed tariffs on steel and aluminum imports from much of the world, ignoring protests from not only trade partners but also domestic industries complaining about the extra manufacturing costs. Washington also is levying tariffs on $50 billion of Chinese imports and threatening to extend penalties to all $500 billion of goods that enter the United States annually from China.

Europe has imposed tariffs on upward of $3 billion of U.S. imports in retaliation. Canada and Mexico have also responded, all adding to widespread ill feeling at what many see as U.S. bullying. So far, President Trump’s only willingness to ease up is his promise to hold off on hitting European auto imports, too, but that is conditioned on wider trade talks going his way.

Assuming an all-out trade war between the United States and the rest of the world is averted, core business fixed investment should make a modest 7% gain this year. Yesterday’s ratcheting down in tensions between Brussels and Washington should give businesses enough confidence to expand plants and invest in equipment. Farmers who must export to keep their profit potential growing have joined aluminum- and steel-reliant CEOs in asking Trump to dial back the protectionism. Some business leaders are talking about moving production out of the United States to be closer to overseas customers. And most want Washington to resume talks with Canada and Mexico to revise the North American Free Trade Agreement so that established cross-border supply lines are not disrupted amid tit-for-tat tariffs.

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The corporate tax cuts are underpinning investment spending. Reducing tax rates to 21% from 35% not only boosted earnings, but incentivized companies to reinvest much of their newfound profits, lest they lose market share to more-efficient competitors. A 7% pickup in business spending would be modest by historical standards but would best 2017’s 5.3% increase. Even with many of the United States’ top export destinations under threat of more American trade actions, U.S. factories continue filling their order books — a powerful underpinning.

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Orders for long-lasting durable goods rose for a third straight month in June. Computers, electronic products, electrical equipment and appliances all got a boost. Fabricated-metal products and machinery orders also went up. A key gauge of business spending — orders for durable goods excluding aircraft — was up 0.6%, helping put it up 6.8% in the first half of the year, compared with the first six months of 2017. Shipments of finished products also were significantly ahead of last year in the first half, rising 7.5% over 2017. That shows factories have so far hummed along.

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