A moderate recovery is building for business investment spending next year. It’s nothing dramatic, but a 3%-4% increase will look good after a flat 2016. The worst of the energy price bust is now over, so there is reason to anticipate some pickup in spending on equipment for oil and gas exploration. And manufacturers have had time to adjust to the drag from the strong dollar that hit export orders hard in early 2016. It’s still a struggle, though, because the greenback is showing renewed strength against major trade partners’ currencies, including the euro, the Japanese yen and Canada’s loonie. The positive news is that overall economic activity is firming up in the closing months of the year. More investment spending by businesses helped push third-quarter GDP growth to a 2.9% annual pace, the strongest quarterly growth in two years.
Manufacturing isn’t booming. But it’s not slipping into recession, as some had feared earlier in the year. U.S. factories are dealing with headwinds: Growth in Asian markets, especially China, is slowing. It’s still unclear how severely the Brexit vote will hurt Europe’s economy, and expansion in Britain is falling abruptly, likely to less than 1% in 2017. The incoming Trump administration’s intentions are still a wild card for America’s trade partners. The tone struck so far by President-elect Trump implies a tough line with other nations that may cause businesses to hold back on some spending decisions until there is more clarity about future policies on trade, taxes and investment incentives.
Factory orders posted a fourth straight increase during October, mostly on higher demand for commercial aircraft. Those orders typically come in batches and their economic benefits are spread over time as the airplanes are completed. Even with four months of orders growth, the value of business through the first 10 months of this year is slightly below the tally for the comparable 2015 period. A key orders category — nondefense capital goods excluding aircraft, which is a proxy for business investment — edged up 0.4% in October, while shipments of finished products grew by a slight 0.2%. Those figures are better than during the worst months of the summer slowdown, but still lag well behind year-ago levels. The U.S. factory sector is beginning to stabilize, thanks to a better second half of 2016, which will help orders for the entire year break even with last year. But a real export turnaround is unlikely before mid-2017 at the earliest, and even that depends on the dollar’s rise leveling off in coming months.