Savannah Chamber

11 5 Due to top-line growth, better profits, and better access to credit, investment spending by small businesses should grow more rapidly in 2018 than in 2017. Home price appreciation is adding to home equity, which is a major source of collateral for many small business loans, so small business owners are optimistic. By historical standards, businesses' capital spending has been very weak, so there is a need to increase spending on nonresidential fixed investment despite low levels of capacity utilization because the capital stock is getting quite old. Investments have been deferred for so long that replacement needs should raise capital spending in 2018. It helps that lending standards will not tighten much. In addition, many companies' cash flows will be adequate relative to the amount of funds they need for investment, lessening the impact of lingering credit constraints or slightly higher interest rates. In 2018, below-average levels of capacity utilization will be a headwind for business spending for equipment and software. The U.S. economy is far from the point where strong GDP growth generates more GDP growth because inadequate capacity begins to encourage more capital spending. But, if much of the excess capacity is either in the wrong location, or wrong industry, or too old, then the push to GDP growth could be larger than expected. The rate of capacity utilization in all industries was 76.6 percent in mid-2017, which is up considerably from its low point of 66.7 percent in 2009. Still, the long-run (1972-2016) average rate of capacity utilization for all industries in the U.S. is 79.9 percent. Because the rate is 3.3 percent below its long-term average, capacity utilization will not spur capacity additions in 2018. Capacity utilization varies by industry, but all of the major subsectors are operating at rates below their long- term averages. For example, in mid-2017, capacity utilization for industries producing goods at the finished stage was 74.9 percent, or 2 percent below its long-run average. Capacity utilization for goods at the primary and semi-finished stages of production was only 75.9 percent, or 4.6 percent below its long-run average. In 2018, producer prices for lumber and industrial commodities will increase faster than prices for crude, intermediate, or finished goods, which should raise capacity utilization for industries producing crude products faster than utilization in industries producing finished or semi-finished products. Corporate Profits The pace of GDP growth will accelerate modestly in 2018, which implies modest growth in domestically generated corporate profits. International markets also will expand more vigorously. But remember that corporate profits are very high, and tight labor markets will push up wage and benefit costs in 2018. On the other hand, businesses are likely to see some regulatory relief, which could lower production costs and increase productivity. Businesses therefore should expect mid-single digit percentage gains in profits in 2018. Expense management and more moderate growth in demand for goods and services will be the primary factors supporting profit growth. Financing should still be reasonably easy to obtain, although slightly more expensive. The recovery of housing markets and substantially more single-family homebuilding will be primary factors contributing to the broadening of the base of profit growth by boosting profits for many home-related industries. Growth in spending for business equipment bodes well for profits earned by technology-oriented companies. Slightly higher oil and modestly higher commodity prices will raise the profits of energy and commodity producing companies as well as businesses that cater to their needs. Productivity growth is likely to be slightly stronger in 2018 than it was in 2017, but still weak from a historical perspective. The dollar will weaken in 2018, which will help profit growth based on overseas earnings. Faster expansion of foreign GDP—especially in the EU—will boost sales prospects for many export-oriented companies. On the negative side, businesses' pricing power will not firm dramatically. It is also important to recognize that financial institutions' profit margins will still be constrained by the flatter-than- normal yield curve. International Trade

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