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Economic Forecasts

Business Investment Slowly Gains Strength

Kiplinger's latest forecast on business equipment spending


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 »

Business investment spending rolls into 2018 on a strengthening trend, boosted by a resurgent U.S. energy industry, steady spending by American consumers and rising global growth. That is providing broader support for the nation’s manufacturing sector, which has been a source of economic strength for more than a year. A 4% increase in core business fixed-investment spending is likely in 2018 — possibly a little better once tax reductions take full effect — on top of a matching 4% gain for all of 2017.

While those increases are modest by past standards, when plant and equipment spending used to jump by double-digit annual rates, they reflect a significant pickup in factory activity after a lengthy period of near-stagnation that followed the 2007-09 recession. In addition, there is an upside for potential spending, with U.S. corporate tax rates slashed to 21% from 35%, now that President Trump has signed into law Republicans’ tax reform plan. The administration hopes that a big chunk of the bottom-line savings will be ploughed into more investment, though it’s not yet clear how corporations will use the additional money — for expansion or to reward their shareholders.

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In November, orders of core capital goods that include nondefense items and exclude aircraft slipped by 0.1% from October. That wasn’t worrying, however, because October orders were revised up to show significantly stronger growth than previously thought. Underlying trends for both orders and shipments of finished products was solid. In fact, business investment increased about 5% in the first 11 months of this year, compared with the same period in 2016, though spending may ease slightly in December.

Stabilization in oil-and-gas prices is a positive for investment spending, since it spurs more drilling. Orders were up in November for electrical equipment and primary metals, though they softened from October levels for communications gear, computers and fabricated metals. There was a pickup in orders for new cars and trucks and parts, and a surge in orders for new commercial aircraft. Boeing received 159 new orders in November, more than double the 64 it tallied in October.


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