What will the U.S. economy look like in 2018? See what forecasters predict

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President Trump is celebrating the final passage of the Republican tax bill, calling it a "historic victory for the American people." At a Cabinet meeting, he also applauded the repeal of the Affordable Care Act's individual mandate requirement. (Dec. 20) AP

The U.S. economy is like an aircraft carrier or supertanker: Once it's steaming in a certain direction, it takes a while to change course.

That suggests today's momentum will continue in the coming year, even though the economic expansion already is the third-longest on record. Here are some predictions for 2018 focused around economic issues and investing:

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A decent — if scarier — year for stocks

It will be difficult to top the market's performance in 2017, in terms of smooth, reliable appreciation. Stocks, as represented by the 500 companies in the Standard & Poor's 500 index, gained ground steadily, without suffering any major downdrafts. Returns in 2018 won't be so consistent and might not be as lofty, but the advance could continue.

Stocks aren't cheap. Valuation measures such as price-earnings ratios are flashing caution. But profitability has been rising, spurred by economic growth around the globe. The pending tax-reform legislation in Congress should help.

Tax reform "will have a big impact on corporate profitability ... all of it positive," wrote Sheraz Mian, research director at Zacks Investment Research. Profits for S&P 500 companies already are expected to rise around 11.7 percent in 2018, he said. Lower corporate tax rates could push that higher.

One concern is that investors could grow more reckless and greedy. Speculation has built for assets such as Bitcoin. That fervor could spill over into stocks and other investments, through forecasters at financial-giant BlackRock see few signs of the euphoria that preceded the stock-market crashes of 2000 and 2008.

A patchy time for real estate

Tax reform could be modestly negative for housing, especially as  the mortgage-interest and property-tax deductions will be scaled back a bit.But the economic underpinnings remain good, including benign interest rates and steady hiring that has pushed down unemployment.

In fact, jobless rates throughout the world's largest economies are approaching their lowest levels in half a century, noted Douglas Porter, chief economist at BMO Capital Markets.

But while affordability remains favorable, real estate is highly dependent on local factors. Good-paying jobs, for example, are lacking in certain parts of the nation, while homes are much less affordable in California and other coastal hotbeds. Whichever city lands Amazon's coveted second headquarters early next year could become a sizzling housing market practically overnight, for better or worse.

More corporate shenanigans

Amid the mostly sluggish economic recovery of the past eight years, top corporations have risen to the occasion by strengthening their balance sheets, cutting costs where necessary and otherwise exercising financial prudence. But with profits now rising and with corporate income-tax rates likely to drop owing to tax reform, companies might ease up on their discipline.

Don't be surprised to see corporations announce ambitious expansion plans, embark in the direction of new products or services, or gobble up other companies in acquisitions. Some such moves will bear fruit, but others won't.

For companies that could bring back or repatriate millions if not billions of dollars from overseas subsidiaries, thanks to lower corporate tax rates, the pressure will be on management teams to handle the windfall wisely. Other uses of this cash might include hiring more staff, buying back shares and raising dividends.

A wider rich-poor gap

Some corporations will use their extra cash to raise employee pay and compensate top executives even more generously.

Executive pay depends largely on profitability and stock-market gains, which explains why payouts have risen in recent years — and could jump in 2018. CEOs who bring home tens of millions of dollars a year are among the most striking example of the nation's rich-poor divide.

Nationally, executive pay among larger companies in the S&P 500 rose 8.5 percent last year to an average $11.5 million, according to a study by Equilar and the Associated Press. CEO pay rose even more dramatically among larger corporations headquartered in Arizona, according to an Arizona Republicstudy.

Other examples include the rural/urban wealth divide, the racial divide (Whites and Asian-Americans have higher net worths than Blacks and Latinos, on average), the education divide (college graduates typically earn more over their lifetimes) and the occupation divide, which rewards people in technology-focused industries, for example.

Income inequality could become a social flash point in 2018, though it's also possible that a rising economic tide will lift enough boats to keep discontent at bay.

A simpler but more confusing year for taxes

Tax reform should make the annual ritual of filing federal income tax returns much easier for a lot of people. That will start in earnest with 2018 returns filed in early 2019, though many people are already starting to plan ahead, and paycheck-withholding rates will adjust early next year.

Authors of the Republican tax plan estimate that only about 10 percent of Americans will need to itemize, down from around 30 percent. But it will time for people to assess the changes and see how they will affect their financial decisions.

For example, will Americans continue to support charities as generously as they have in the past? While the tax deduction for charitable donations was spared, fewer people will itemize these and other write-offs, preferring to take the higher standard deduction instead. That means more people won't have a tax incentive to donate.

Expect similar head-scratching in the months ahead as people weigh the tax benefits of homeownership, medical expenses, retirement accounts and other personal-spending decisions. Plus, the federal changes, if they materialize, will affect tax policies and budgets at the local and state levels, with broad implications.

Reach Russ Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.

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