US economy might hit this milestone for first time in 11 years
After a rousing rally in the spring, the economy is back on track for a heady year of growth that could come tantalizingly close to an elusive mark last achieved in 2005.
The economy is likely to grow close to a four percent annual pace in the second quarter after a 2.2 percent gain in the first three months of 2018. That would put the US in good position this year to meet or beat three percent growth in gross domestic product, the official scorecard for the economy, marketwatch.com reported.
The last time the US got to the top of that mountain was 11 years ago. Indeed, the economy has never gone this long before without reaching three percent GDP.
What’s different this year? Simple. Businesses are investing more money. Although household spending accounts for about 70 percent of economic activity, higher business investment is the difference between a good economy and a great one.
Stronger business investment prodded a panel of economists tied to the American Bankers Association to lift their GDP forecast for 2018 to 2.8 percent from 2.4 percent. And five of the 13 panelists predicted three percent growth or higher. It’s been a long time since forecasters were that optimistic.
Ellen Zentner, chairwoman of the ABA advisory panel and chief US economist at Wall Street powerhouse Morgan Stanley, said, “Tax cuts and regulatory reform will help support continued growth in business investment.”
The growth comes as the Trump White House has slashed corporate tax rates for the first time in 32 years, added a slew of investment incentives and has mounted a controversial rollback of regulations.
Consider a key yardstick of business investment known as core orders for durable goods — or items made to last at least three years. Think appliances, furniture, cars, tractors, drilling rigs and such.
These orders actually fell in 2015 and 2016, recovered in 2017 and have been especially strong in the past year. Investment is now climbing at a 12-month rate of 5.7 percent.
Wall Street will get the latest reading on business investment on Wednesday.
Another incentive for businesses to invest is a gradually tightening labor market that resulted in the lowest unemployment rate in 18 years and perhaps the biggest shortage of skilled labor in a half-century.
With good help so hard to find, companies are investing in technology and equipment to allow them to produce more goods and services with the same number of workers or fewer. Self-serve kiosks at fast-food restaurants such as Wendy’s WEN, +1.06 percent or selfcheckout at pharmacies and grocery stores are some more visible examples of that process at work.
The surge in business investment, however, could be jeopardized by the cacophony of trade fights initiated by the Trump administration. While the White House goal to bring down foreign trade barriers may be laudable, it’s also making corporate chieftains and small business owners skittish.
“Lingering uncertainty over possible trade actions could dampen business investment,” Zentner said.
Another potential hurdle: Higher interest rates. The Federal Reserve is gradually raising the cost of borrowing to make sure the US economy doesn’t run so hot that inflation explodes.
The Fed will get another look at its preferred inflation gauge, called the PCE index, later this week. Inflation hit the central bank’s two percent target in the spring for only the second time since 2012. If it keeps rising, so will US interest rates.
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