Growth in CapEx Spending Bodes Well for Economic Future, Says GSU’s Rajeev Dhawan

ATLANTA — When businesses loosen their purse strings and increase their capital expenditures (CapEx), good things tend to follow. U.S. businesses this year have already doubled the volume of CapEx recorded for all of 2016, which has contributed positively to the nation’s real gross domestic product (GDP), according to Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University’s (GSU) J. Mack Robinson College of Business.

Speaking at his quarterly economic forecast, which was held on Wednesday, Aug. 23 at GSU’s Centennial Hall Auditorium, Dhawan says that the 5.2 percent growth of nonresidential fixed investment in the second quarter over the prior quarter has boosted his outlook for the U.S. economy.

“Compared to February, my forecast is way more optimistic,” says Dhawan. “I don’t usually change my opinion that quickly until all the evidence comes in. I’ve always said ‘investment today, jobs tomorrow.’”

CapEx spending was down in 2016 leading up to the U.S. presidential election, which Dhawan says was due to both oil prices coming down and the uncertainty surrounding the election’s outcome.

“Everyone was waiting to see which way the election was going to go,” says Dhawan. “Since the election, CapEx spending has rebounded sharply.”

Dhawan expects business investment to settle at 4.5 percent growth for 2017 and for real GDP, which increased significantly from the first quarter (1.2 percent) to the second (2.6 percent) on an annualized basis, to grow at a pace of 2.1 percent for the year.

In 2018, Dhawan expects real GDP to accelerate to 2.3 percent and business investment to remain at 4.5 percent growth.

Dhawan also predicts this fall to be eventful on the legislative front, with the government contending with the budget and debt ceiling issues in September and October. Dhawan doesn’t expect those deliberations to result in a government shutdown scare like in past years.

“It will first get a bit shaky in October as the debt ceiling debate unnerves the financial markets, but only for a short while,” Dhawan wrote in his quarterly Forecast of the Nation, which was released Wednesday.

Following those discussions, Dhawan expects the government to deliver an early Christmas present around Thanksgiving: a personal income tax cut for the middle class.

“There’s not enough cash in the register to give everyone a tax cut,” says Dhawan.

To cap off 2017, Dhawan expects the Federal Open Markets Committee (FOMC) to boost the federal funds rate again, which would be its third December hike in a row and its fourth rate hike in the past 12 months. The predicted boost in the federal funds rate will likely quell the momentum of the tax cuts, according to Dhawan.

“You tap the brakes harder only if you are gathering speed,” wrote Dhawan.

Janet Yellen’s term as board chair of the Federal Reserve and head of the FOMC ends on February 1, 2018, and Dhawan says it’s imperative that the transition be seamless.

“Whether it’s nominated or a handoff, that process has to be smooth. If we mess up that process, bond markets will react, and that’s where the pain comes in,” says Dhawan.

On the global front, Dhawan says that for now, the U.S. spat with North Korea is just noise. He says that the lack of tariffs on China signals that we’re trusting China to handle bringing North Korea to heel, as China supplies 90 percent of North Korea’s imports.

Dhawan says that it’s difficult for most Americans to understand the public posturing between President Donald Trump and North Korea supreme leader Kim Jong-un, but that his upbringing gives him clarity about the situation.

“This is a classic game of who is crazier,” says Dhawan. “For those of you who went to co-ed high schools, there’s no way you can figure out this strategy. You had to go to a nasty all-boys high school like I did where every day you saw this strategy.”

Other highlights from Dhawan’s national report:
• Jobs will grow by a monthly rate of 174,000 in 2017, 156,000 in 2018 and 144,000 in 2019.
• Housing starts will average 1.21 million units in 2017, rise to 1.25 million in 2018 and 1.28 million in 2019.
• Expect auto sales of 16.8 million units in 2017, 16.4 million in 2018 and 16.2 million in 2019.
• The 10-year U.S. Treasury rate will average 2.5 percent in 2017, 3.1 percent in 2018 and 3.8 percent in 2019.

— John Nelson

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