The “tax bill cometh.” According to the press, this is going to be the single biggest factor to jump-starting economic growth since the invention of the wheel.
Interestingly, even the Fed’s economic projections are suggesting that economic growth will pick up over the next two years from the impact of tax cuts. (Chart is the average of the range of the Fed’s estimates.)
Of course, you should note the Federal Reserve has NEVER accurately forecasted future economic growth. In fact, it has become an annual tradition of over-estimating growth and then slowly ratcheting down estimates as reality failed to achieve overly optimistic assumptions.
However, despite the Administrations hopes of long-term economic growth rates of 3% or more, in order to pay for the deficits created by cutting revenue, even the Fed has maintained their long-run outlook of less that 2% annualized growth. (Down from 2.7% in 2011)Hardly the supportive stamp of endorsement for the “greatest tax cut” of all-time.
But for economic growth to blossom, the consumer will have to pull their weight given consumption makes up roughly 70% of GDP. The problem, as witnessed by the latest retail sales report, is that consumptive spending is far weaker than headlines suggest.
On Thursday, the retail sales report for November clicked up 0.8%. Good news, right?
Not so fast.
First, sales of gasoline, which directly impacts consumers ability to spend money on other stuff, rose sharply due to higher oil prices and comprised 1/3rd of the increase. Secondly, building products also rose sharply from the ongoing impact of rebuilding from recent hurricanes and fires. Again, this isn’t healthy longer-term either as replacing lost possessions drags forward future consumptive capacity.
But what the headlines miss is the growth in the population. The chart below shows retails sales divided by those actually counted as part of the labor force. (You’ve got to have a job to buy stuff, right?)
As you can see, retail sales per labor force participant was on a 5% annualized growth trend beginning in 1992. However, after the financial crisis, the gap below that long-term trend has yet to be filled as there is a 22.7% deficit from the long-term trend.(If we included the entirety of the population, given the number of people outside of the labor force that are still consuming, the trajectory would be worse.)
But wait, retail sales were really strong in November?
Again, not so fast.
The chart below shows the annual % change of retail sales per labor force participant. The trend has been weakening since the beginning of 2017 and shows little sign of increasing currently.
While tax cuts may provide a temporary boost to after-tax incomes, that income will simply be absorbed by higher energy, gasoline, health care and borrowing costs. This is why, 80% of Americans continue to live paycheck-to-paycheck and have little saved in the bank. It is also why, as wages have continued to stagnate, that the cost of living now exceeds what incomes and debt increases can sustain.
Yes, corporations will do well under the “tax reform” plan, and while the average American may well see an increase in take-home pay, it will unlikely change their financial situation much. As a result, economic growth will likely remain weak as the deficit expands to $1 Trillion over the next couple of years and Federal debt marches toward $32 trillion. As noted by the CFRB
“Fiscal conservatives on the right have lost a massive amount of credibility based on the GOP budget they passed this year. After many years of calling for a budget that cut spending, reformed entitlements, controlled the debt and balanced the budget, they failed to enact even one of those goals when they finally had a chance.
Out of a possible $47 trillion in spending over 10 years, the budget called for cutting an utterly pathetic $1 billion. Their fiscal credibility died with a whimper. I doubt that credibility can be regained, but it seems quite likely that some of the more conservative GOP members will call for letting the sequester hit.”
So, when someone acts astonished that things didn’t work out as planned…just remind them that “ignorance is no excuse.”
Just something to think about as you catch up on your weekend reading list.
Real Investment Advice is powered by RIA Advisors, an investment advisory firm located in Houston, Texas with over $1 billion in assets under management. As a team of certified and experienced professionals, we seek to provide our clients with educational services and the necessary information and tools to educate you in the field of finance, investing and economics. To this end, you can use the Real Investment Advice Platform to avail yourself of various video, audio and proprietary collections of information at your leisure to learn and gather the necessary information that you may need in the fields of investment news, investment opinion, financial news, financial opinion, economic news and economic opinion, finance, investing and economics. Utilizing the functionality and tools provided by Real Investment Advice, you can access this information in a variety of ways, including via video and audio programming, audio and visual media content streaming services, downloadable audio-visual media, uploaded, posted or tagged third-party videos, receiving or viewing audio and video clips, blogs, podcasts, and YouTube videos, all of which are accessible on the Real Investment Advice media platform and/or various Internet and communications links that are accessible via the Real Investment Advice Platform and allow for the broadcasting, transmission and streaming of the information and audio-visual content to your media devices and other communications platforms for your viewing and listening pleasure. All of these tools and sources of information are made available to you so that you can utilize the same to make the right financial, economic and investment decisions.
RIA Advisors offers multiple custodial arrangements, either directly of through wholly owned subsidiaries, with Fidelity, TD Ameritrade, Charles Schwab and Interactive Brokers.
Coverage of global markets, bond markets, equity markets, commodities and economic news.