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Economic growth: a post-election reality check

July 26, 2017
John Portwood
John Portwood
Despite widespread optimism about the prospects for accelerated economic growth following last year’s presidential election, as evidenced by the stock market’s “Trump bump,” the fundamental indicators do not support that expectation. The outlook for the rest of the year does not point to a growth rate far exceeding 2%.
At the same time, when a promising business opportunity comes along specific to your industry sector or particular business circumstances, it still makes sense to seize it. My point is not to expect a “rising tide to raise all boats,” to borrow the phrase popularized by President John Kennedy back in the early 1960s.
  Economic growth: a post-election reality check
Spending and borrowing trends
Consumers have been continuing a trend that began during the 2008 financial crisis of trimming personal debt levels. They have not been on a spending spree. Whatever their general feelings about the economy, people typically are only willing to open their wallets wide when they believe their jobs are secure. It appears many don’t feel that way today, despite the low unemployment rate.
Corporations, on the other hand, despite generally high levels of debt already on their books, have not shied away from borrowing. But rather than use borrowed funds to make capital equipment investments to increase productivity or expand capacity, many have used those dollars to support dividend levels and buy back their stock to support their stock price.
Tax reform
President Trump has proposed cutting the corporate tax rate to 15% from the current maximum of 35%. While that could benefit many companies, it’s important to remember that average effective rates vary considerably by industry sector, due to tax preferences that favor some industries over others. That means even if the corporate rate is lowered, the impact would be uneven.
And, as has been apparent already with many of President Trump’s legislative initiatives, Congress has its own ideas about national priorities. Due to concerns about the national debt, any tax reform measure that comes out of Congress, if not “revenue neutral,” will certainly contain some tax increases. 
The prospect of exhausting the Social Security “trust fund” within a decade if present trends continue weighs heavily on Congress.
Who those offsetting tax increases will impact, and to what degree, is presently unknown. That means anticipating a jolt to GDP growth from changes in tax policy is premature at best.
Impact of Fed actions
Meanwhile, the Federal Reserve has been easing its foot off the monetary policy accelerator for months, and appears to be itching to tap the brakes with very small but steady increases in the discount rate. The Fed’s quantitative easing since 2008 hasn’t triggered inflation at the consumer level, but has contributed to a run-up in securities prices and real estate values. Yet the “wealth effect” phenomenon — individuals increasing their spending because they perceive themselves as wealthier — has not been in evidence.
Also, keep in mind the Fed’s actions rarely impact long-term interest rates, for better or worse. And while low long-term rates make borrowing inexpensive for consumers and corporations alike, there is also a downside: The incomes of bond owners are constrained, a phenomenon economists call “financial repression,” limiting their capacity to purchase goods and services.
Other variables
Basic economic variables that have as much impact, or more, than tax, fiscal and monetary policy include population growth and labor force participation rates. Both have been stagnant, and little change is in sight. The same is true of median household income.
Because the economy remains somewhat fragile, it is vulnerable to any major shock, whether it be geopolitical (e.g., a shooting war involving North Korea) or financial (like the collapse of a top European bank). Barring such a shock, I do not see a recession around the corner.
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