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Economic Forecasts

Tax Reform Will Boost Economy

Kiplinger's latest forecast for the GDP growth rate

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GDP 2.9% pace in '18, up from 2.2% in '17 More »
Jobs Unemployment rate down to 3.8% by end '18 More »
Interest rates 10-year T-notes at 3.0% by end '18 More »
Inflation 2.5% in '18, up from 2.1% in '17 More »
Business spending Up 4% in '18, spurred by expanded tax breaks More »
Energy Crude trading from $55 to $60 per barrel in April More »
Housing Existing-home sales up 1.0%, new-home sales up 7.5% in '18 More »
Retail sales Growing 4.7% in '18 (excluding gas) More »
Trade deficit Widening 5%-6% in '18 More »

Tax cuts for both businesses and individuals should goose the economy, but not as much as President Trump wants. Improving business profitability should generate business investment, but some of the profits will go toward stock buybacks and shareholder returns. The rising stock market and burgeoning home values will encourage consumer spending, though not as much as Republicans would like until workers see bigger bumps in their paychecks. Tax cuts for individuals will help, but wealthier taxpayers, who tend to save more, benefit the most.

Nevertheless, GDP should solidly bump up to 2.9% in 2018, after 2017’s 2.3% pace. Rising household wealth and income, job gains (though 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.

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Government spending, except on defense, will remain flat and thus do little to boost GDP. Federal agencies can add positions again but will not go on hiring sprees, partly because of the dearth of middle-management political appointees who approve new hires. State and local governments’ spending plans are cautious, given the uncertainty of funding for Medicaid and other programs supported by Uncle Sam.

2018’s first quarter will likely be its weakest. Most companies will not make paycheck withholding changes caused by the tax rewrite until March or April. The new year’s bitterly cold temperatures in much of the country could dampen auto sales and consumer spending, especially in the large Northeastern metro areas that are getting hammered by a winter storm.

GDP likely grew 2.7% in 2017’s final quarter, which government reports to be released January 28 will show. Consumer spending probably remained strong, given indications of a robust holiday season. Business investment in equipment is picking up. And unplanned spending in response to the fall’s hurricane damage probably continued into the fourth quarter. Tens of thousands of homes are in various states of repair, and tens of thousands of vehicles are being replaced.

Look for the Federal Reserve to hike interest rates three times this year. The Fed will likely make its next quarter-percentage-point raise when it meets on March 21. Expect a greater divergence of viewpoints at Fed meetings this year, as governors who want to raise rates more often because unemployment is low clash with those who want to delay because inflation is too low.

See Also: The Trump Effect on Financial Markets

Source: Department of Commerce: GDP Data