7% Gain Likely in ’18 if Trade War Is Averted

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Kiplinger's latest forecast on business equipment spending


GDP 3.0% 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 3.2% 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 $60 to $65 per barrel in June More »
Housing Price growth: 5.0% by end of '18 More »
Retail sales Growing 4.2% in '18 (excluding gas and autos) More »
Trade deficit Widening 5%-6% in '18 More »

Firmer global growth and lower U.S. taxes can solidly underpin a modest acceleration in business spending this year — provided that a trade war doesn’t break out. Surveys show business confidence is at record levels, while after-tax corporate earnings are strong and rising as the benefits from last year’s sweeping tax cuts kick in. The only potential fly in the ointment is the risk that sparring over trade issues between the United States and China, the world’s two largest economies, could turn into a full-fledged spat that crimps world trade volumes. Barring that, look for core business fixed-investment spending to jump as much as 7%, following last year’s 5.3% increase.

For 2018 and beyond, the U.S. corporate tax rate is only 21%, down from 35%, prompting many businesses to pledge a bump in investments and pay rates. The new tax rules were further sweetened to allow businesses to fully depreciate assets put into service from September 2017 through 2022. The clear intent is to encourage companies to expand and upgrade the expensive equipment they use — everything from new trucks to metalworking machinery to computers. Big-ticket spending like that expands the economy and allows companies to increase their exports, further boosting the economy.

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February provided evidence that businesses are responding. New orders for core capital goods (a category that excludes aircraft and military goods and is used as a proxy for business investment) climbed 1.8% after contracting slightly in January. February’s $68 billion marked the highest level for capital spending since 2014, when the energy sector was booming, and oil and gas drillers were spending freely to boost output. February’s spending jump was broad-based, covering primary and fabricated metals, machinery and electrical equipment, and appliances, as well as motor vehicles and transportation equipment. There is a possibility that some businesses may have rushed to place orders to get ahead of the Trump administration’s imposition of tariffs on imported steel and aluminum, however.

Indications are positive in some key sectors for capital spending over the balance of the year. Oil and gas prices have stabilized, providing important impetus for a range of industries, from producers of valves and pumps to pipeline makers and transporters. Factories already are busy, as is evident in the 1.4% increase in shipments of finished products during February. (January’s gain was only fractional.) Among the industries posting the best increases in orders were some of the country’s biggest employers — notably Boeing and its suppliers, as new, nondefense aircraft orders surged 25% last month.

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