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 4% annual pace in the second quarter after a 2.2% gain in the first three months of 2018. That would put the U.S. in good position this year to meet or beat 3% growth in gross domestic product, the official scorecard for the economy.
The last time the U.S. got to the top of that mountain was 11 years ago. Indeed, the economy has never gone this long before without reaching 3% GDP.
What’s different this year? Simple. Businesses are investing more money. Although household spending accounts for about 70% 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% from 2.4%. And five of the 13 panelists predicted 3% growth or higher. It’s been a long time since forecasters were that optimistic.
“Tax cuts and regulatory reform will help support continued growth in business investment,” said Ellen Zentner, chairwoman of the ABA advisory panel and chief U.S. economist at Wall Street powerhouse Morgan Stanley.
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%.
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.