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US companies’ profits are rising and tax cuts are leaving business with more of that gain to invest. We have thus increased our forecast of GDP growth for this year and next. We also now expect core inflation on the personal consumption expenditure measure to rise to 2.0 per cent in 2019 – matching the Federal Reserve’s medium-term target for the first time since it was formally adopted in 2012.

The Fed is expected to follow a quarter-point September interest rate rise with another in December and further hikes in the federal funds rate in March and June 2019.

But higher interest costs are already pushing up government financing costs with the 2018 US budget deficit now forecast to reach 4.2 per cent of GDP. Next year, the federal budget deficit is likely to top a trillion dollars.

Corporate profits in the second quarter of 2018 were up 7.7 per cent from a year earlier. However, after-tax profits grew by 16.1 per cent. Thanks to newly-enacted federal tax cuts, companies’ tax payments dropped 33 per cent, or USD119bn. Even after increased payments to shareholders, that should lead to faster growth in business investment

The upward adjustment to our estimates of investment spending for the second half of 2018 is enough to lift our forecast for GDP growth this year to 3.0 per cent. And because the momentum of growth should carry over into 2019, we are now predicting 2.5 per cent growth for next year.

New orders for capital equipment have surged in recent months, returning them to the record level set in early 2012. Shipments, which lag orders by a few months, should continue to move higher, adding to GDP growth for the second half of the year.

Surveys of small businesses also indicate their profits are increasing and investment intentions rising, with optimism reaching record-high levels. For the first time in its history, the National Federation of Independent Business survey showed more firms reporting earnings rising than declining.

A rising percentage of the surveyed firms now see this as a good time to expand their businesses.

Although inflation has risen it should stabilise in the year ahead. Higher petrol prices pushed consumer price inflation to 2.7 per cent in the year to August but, with crude oil prices flattening, we expect the headline CPI rate to drop back to 2.1 per cent in 2019.

We have raised our forecast for core personal consumption expenditure inflation to 2.0 per cent next year – which would mean the Fed’s target is finally met – but it should remain at close to that level the next year or so.

At the margin, the imposition of tariffs on some imports could put upward pressure on prices, but although wage gains have accelerated recently, we don’t think this will lead to higher inflation in the near term.

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