The U.S. Economic Forecast Q1 2018
The U.S. economic forecast for the next three months is highly favorable—at least on paper. The framework is set in favor of high growth. President Donald Trump managed to pass his ambitious tax reform, consisting of the biggest fiscal cuts for corporations in the U.S. since 1986 and Ronald Reagan’s “supply-side economics.”
His detractors called it trickle-down economics and they had reasons to doubt the long-term effectiveness of tax cuts since the main beneficiaries are corporations and the already wealthy. That same skepticism might be what underlines U.S. economic predictions in 2018.
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It would be foolish to dismiss the effect of the tax reform on the U.S. economic growth forecast. The U.S. economy grew in 2017, having registered about three-percent GDP growth in the second and third quarters of 2017. The fourth quarter results are sure to re-confirm those rates—if not a little more.
The Tax Cuts Will Sustain Growth in Q1 2018
The fiscal reform effects will be felt intensely in the first quarter of 2018. Many companies have offered bonuses to employees, claiming that the tax cuts will stimulate research and development and/or expansion. One of the fastest growing automakers, Fiat-Chrysler Automobiles NV (NYSE:FCAU), announced investments of some $1.0 billion in Michigan alone to update the Warren Truck Assembly Plant and hire about 2,500 more employees. The tax cuts have allowed Fiat-Chrysler Automobiles (FCA) to shift production of a heavy-duty “Ram” truck model from Saltillo, Mexico to Warren. (Source: “Fiat Chrysler Automobiles To Invest Over $1B In Michigan,” Business Facilities, January 18, 2018.)
If Trump could evaluate his economic reform plan based on FCA alone, he would be justified in claiming a nice success for himself. But FCA has been on an ascendant trend for a few years now. Moreover, few other companies have announced similar expansions.
Apart from bonuses in the order of about $1,000-$2,000 for employees of a few major corporations, there has been little talk of salary increases. That’s the missing ingredient to create a meaningful and lasting economic growth phenomenon. Therefore, companies will probably make some grandiose statements about expanding production and hiring more people in the first quarter of 2018.
But…
If by the third or fourth quarter, the millions of employees don’t start seeing real increases in their salaries, the economy could start to suffer. The growth rate will slow. The tax cuts, after all, are mostly for corporations and the already wealthy. The middle and lower classes won’t gain much from Trump’s cuts. The risk is that what are already some of the biggest social disparities in the advanced economies will exacerbate. Social—and related racial—tensions in the United States are just a few degrees shy of blowing up in a massive popular revolt.
If other presidents did not reform—that is, cut—taxes before, it wasn’t because they were somehow not as brilliant as Trump. It was because chopping some 15% from corporate taxes (bringing them from about 35% to 20%) cannot be done without shifting the burden somewhere else.
The tax cuts imply equal or greater cuts to social services and healthcare most of all. The big S&P 500 companies that have offered employees some benefits because of the fiscal break are few. Their employees could probably rely on decent insurance and other benefits before the cuts. After all, we’re talking about such corporations as American Airlines Group Inc (NASDAQ:AAL), Bank of America Corp (NYSE:BAC), Southwest Airlines Co (NYSE:LUV), Wells Fargo & Co (NYSE:WFC), and Comcast Corporation (NASDAQ:CMCSA) among others.
Overall, their aggregate employee numbers are a blip compared to the size of the American workforce. Some of those companies were guilty of downright fraudulent practices before the 2008 crisis. It’s a wonder that they’re still around in the first place. Moreover, however generous the employee bonuses are, the fiscal reforms will largely fill the pockets of the corporations and their investors. In other words, the already well off.
Beware Rising Social Inequality. The Czar Did Not and Look What Happened
Perhaps, the tax reform could have been less ambitious in actual cuts and better distributed to favor the middle and lower classes. After all, the bulk of the American population does not identify with CEOs or Wall Street tycoons. The more money/resources they have to spend, the more sustained and sustainable the economic growth.
The IMF economic forecast for the world is optimistic in 2018. But it warns that if, in the short term (the first quarter), the U.S. might grow faster than other advanced economies, it’s because Trump’s fiscal reform and national debt levels will start to cause worry later. (Source: “IMF Is ‘Optimistic’ on the Global Economy,” Bloomberg, January 8, 2018.)
Rather, what the economy will experience is a surge of guidance-beating earnings reports for the fourth quarter of 2017 coming out over the next few weeks. This will mask the underlying problems of the U.S. economy and the inequalities that characterize it. In turn, the stock market will continue to rise, fueling the already insanely high valuations. This will last for a while. But the U.S. economic outlook will change. The current binge cannot last forever and perhaps not for the duration of 2018. A hangover is imminent.
The U.S. economic growth rate, whether at one percent or higher than three percent, masks a fatal weakness: social and economic inequality. You can dismiss it as “pinko liberal” talk but it won’t make the problem go away. The history of the 20th century is replete with examples of GDP growth covering up socio-economic imbalance. The Russian Revolution of 1917 is merely the most famous and significant of those events.
The Federal Reserve estimated that based on 2016, the richest one percent owns about 40% of the entire wealth in the United States. The 90% that constitute the middle and lower classes detain merely 22%-23%. That’s a third of what it was in 1989, when the Fed started to measure this indicator. (Source: “Record inequality: The top 1% controls 38.6% of America’s wealth,” CNN, September 27, 2017.)
And note, the richest Americans, including Warren Buffett and Melinda Gates, are warning that they should pay more, rather than less tax. They understand that if the economy doesn’t change its distribution patterns—that is, if it ignores gross inequalities—the inevitable result is the disintegration of the social order. The rich won’t be able to enjoy their wealth because they’ll be too busy protecting it from the angry mobs. We aren’t there yet, and we won’t be there after Q1 2018. But the alarm is sounding and the time to do something about it is now.
