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Economic Forecasts

GDP on Track for 2018 Climb

Kiplinger's latest forecast for the GDP growth rate

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GDP 2.9% pace in '18, up from 2.3% in '17 More »
Jobs Slower job gains likely this year as labor market tightens 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 $65 to $70 per barrel in July More »
Housing Price growth: 5.0% by end of '18 More »
Retail sales Growing 4.4% in '18 (excluding gas and autos) More »
Trade deficit Widening 5%-6% in '18 More »

GDP should solidly bump up to 2.9% in 2018 after 2017’s 2.3% pace. Tax cuts will boost GDP through rising consumer spending and stronger business investment. Expanding household income, job gains (albeit smaller than before) and credit utilization are also underpinning consumer spending. Housing construction should pound ahead. Manufacturers will benefit from stronger exports as the global economy improves. However, auto sales will downshift (though they haven’t yet). The effects of a minor trade war—while any slowdown in international trade would likely be small, the uncertainties could create knock-on effects that ding business investment—are growth’s biggest risk.

GDP increased 2.3% in the first quarter of 2018, a decent showing. Consumer spending rose a modest 1.1%, but this was expected after a spending splurge in the fourth quarter. But inflation-adjusted consumer disposable income climbed a robust 3.4% because of the tax cuts, setting up consumption resurgence in the later quarters of this year. Businesses are stockpiling inventory in anticipation. Also, exports of food, consumer goods and cars grew more strongly than expected, benefitting U.S. manufacturers and farmers.

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Fourth-quarter growth in 2017 of 2.9% is 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.

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 capital spending, but some of the bigger profits will go toward stock buybacks and shareholder returns. Increased wealth and burgeoning home values will encourage consumers to spend a little more, though recent uncertainties in the stock market could scale that back. Tax cuts for individuals will help, but wealthier taxpayers, who tend to save more, are likely benefiting the most.

Look for the Federal Reserve to hike interest rates twice more this year, in June and December. With the change in Federal Reserve Board members, there are now definitely more pro-rate hike board members than those who are against. The main discussion may be whether to raise rates in September as well.

See Also: For Business Owners, It's a Seller's Market

Source: Department of Commerce: GDP Data