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Economic Forecasts

Rising Deficit Boosts GDP, Dings Stock Market

Kiplinger's latest forecast for the GDP growth rate

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GDP 3.0% pace in '18, up from 2.3% in '17 More »
Jobs Unemployment rate down to 3.8% by end '18 More »
Interest rates 10-year T-notes at 3.3% by end '18 More »
Inflation 2.6% 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 $55 to $60 per barrel in April More »
Housing Existing-home sales up 1.6%, new-home sales up 9.8% in '18 More »
Retail sales Growing 4.6% in '18 (excluding gas) More »
Trade deficit Widening 5%-6% in '18 More »

GDP should solidly bump up to 3.0% in 2018, after 2017’s 2.3% pace. The government’s deficit will grow this year, which will boost GDP, although the accompanying increase in long-term interest rates is spooking the stock market. Rising household income, job gains (albeit smaller than before) and credit utilization are underpinning consumer spending. Housing construction should pound ahead. Manufacturers will benefit from stronger exports as the global economy improves. However, auto sales will downshift rapidly.

Fourth-quarter growth of 2.6% is a lot stronger than it looks. Consumers, businesses and even government picked up the spending pace. Consumers spent heavily in nearly all categories. The flip side of strong consumer spending was a big jump in imports, which detracted from overall growth. Housing made a turnaround in the fourth quarter, and business equipment purchases grew a little faster. An unexplained drop in business inventories prevented the headline number from being much higher.

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Tax cuts for both businesses and individuals should goose the economy going forward, but likely not as much as President Trump would like. Improving business profitability should generate business investment, but some of the bigger profits will go toward stock buybacks and shareholder returns. Despite its recent drop, the stock market is still 12 percent higher than a year ago. That increased wealth and burgeoning home values will encourage consumer spending, but until workers see bigger bumps in their paychecks, not as much as Republicans hope. Tax cuts for individuals will help, but wealthier taxpayers, who tend to save more, benefit the most.

Look for the Federal Reserve to hike interest rates three times this year. The Fed will reveal by how much when it meets March 21. If it raises rates then, expect at least two more to follow: one in June and one in December. Fed governors who want to raise rates more often because unemployment is low will jockey with those who want to delay because inflation is low.

See Also: The Trump Effect on Financial Markets

Source: Department of Commerce: GDP Data