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Economic Forecasts

Profits and GDP Surge in Second Quarter

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 will decline further More »
Interest rates 10-year T-notes at 3.2% by end ’18 More »
Inflation 2.5% 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 December More »
Housing Price growth: 5.0% by end of ’18 More »
Retail sales Growing 5.1% in ’18 (excluding gas and autos) More »
Trade deficit Widening 5%-6% in ’18 More »

Pretax corporate profits surged in the second quarter, indicating that the underlying economy is strong. And, of course, given the tax cuts, after-tax profit growth was even higher. Profit growth should continue, though at a slower pace. Higher compensation for workers because of the tight labor market, and higher costs for materials because of tariffs, are likely to start eroding profit margins at some point.

The nation’s gross domestic product expanded at a 4.2% rate in the second quarter, up from the first quarter’s 2.2%. After taking the winter off, consumers rushed back this spring, perhaps because their tax bills shrank. Americans should up their spending for the rest of the year 3% or more. Business investment grew strongly as mining exploration and shale oil wells surged in response to higher oil prices. However, spending on business equipment grew at its slowest rate in six quarters.

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Exports advanced strongly as purveyors of soybeans and other goods shipped to China drew down stockpiles to get in ahead of Beijing’s tariffs. The accelerated schedule should diminish third quarter export growth a good deal.

GDP should increase 2.9% for the year after 2017’s 2.2% pace. Growth in the second half of 2018 will likely be at a 3.3% pace. Tax cuts are boosting GDP through rising consumer spending and stronger business investment. Higher wages, expanding household income, job gains (albeit smaller than before) and credit utilization are also underpinning consumer spending. However, auto sales will downshift. A larger trade war is growth’s greatest threat. Although any slowdown in international trade would likely be small, the uncertainties could create knock-on effects that slow business investment plans.

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 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.

Source: Department of Commerce: GDP Data