FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
December 19, 2017
- US Economy is Booming, Rest of World Follows Suit
- US Retail Sales Stronger Than Expected in November
- President Trump Keeps Promise to Reduce Regulation
- Controversial GOP Tax Reform Set to Pass This Week
There’s so much to talk about in this week before Christmas it’s hard to know where to start. The economy continues to gain momentum. Last week, the Atlanta Fed revised its GDPNow forecast from 2.9% to 3.2% for the 4Q. If accurate, that will mark our third consecutive quarter of 3+% growth in the economy. Consumer confidence remains very strong.
Last week’s retail sales report for November came in considerably stronger than pre-report estimates. For the 12 months ended November, retail sales rose an impressive 5.8%, the largest increase since 2011. Meanwhile, US stocks continue hitting record highs week after week. This is all good news going into the holidays.
It now looks very likely that the Republicans in Congress will pass their tax reform package this week. That will lower the federal corporate tax rate from 35% to 21%, along with rate reductions for most Americans, which should further boost the economy next year. I’ll talk more about that below.
To the surprise of no one, Janet Yellen & Company raised the Fed Funds rate another quarter-point to 1.25-1.50% and maintained its intention of raising it three more times next year – based on its improving assessment of the US economy.
US Economy is Booming, Rest of World Follows Suit
The US economy continues to gain momentum and as noted above, the Atlanta Fed now believes we will experience our third consecutive quarter of 3+% growth in GDP for the 4Q. After starting the year with disappointing growth of only 1.2% (annual rate) in the 1Q, the economy accelerated sharply in the 2Q to 3.1% followed by 3.3% in the 3Q.
If GDP indeed comes in at 3.2% for the 4Q, that will mean growth for the year will have been a solid 2.7% compared to only 1.5% for all of 2016. Several forecasters I follow, including the New York Fed, believe that 4Q growth could be closer to 4%. If so, that means growth for this year could be close to 3%, and next year has the potential to be even better barring any negative surprises.
Most important, this is not just an American growth story. For the first time in years the world is experiencing synchronized growth which is why Goldman Sachs and Barclays, among others, have recently predicted 4% global growth in 2018. The entire world benefits when our economy is healthy, and the strength overseas is reinforcing the US resurgence.
US Retail Sales Stronger Than Expected in November
Americans are spending more than expected this holiday season, fueled by income gains, confidence in the economic outlook, buoyant financial markets and modest inflation. Retail sales increased more than expected in November as the holiday shopping season got off to a strong start, pointing to sustained strength in the economy.
The Commerce Department reported last Thursday that retail sales rose 0.8% last month. Economists polled by Reuters predicted retail sales would increase only 0.3% in November, so the report was considerably stronger than expected. Spending data for October was revised upward to show sales gaining 0.5% instead of the previously reported 0.2% rise.
For the 12 months ended November, retail sales rose an impressive 5.8%, the largest increase since 2011. Despite worries about online competition, brick-and-mortar merchandisers such as department stores also fared well last month, registering a 3.6% sales increase from a year earlier. It was the best November performance since 2010.
The boost includes in-store and online spending at traditional retailers such as Wal-Mart and Nordstrom Inc., which clocked the largest year-over-year November sales increase in seven years. Home-furnishing stores, electronics and appliance stores also logged strong sales numbers, despite competition from online-shopping websites, which also posted robust gains.
“It’s an impressive start to the holiday season and probably the best in the last few years,” said Jack Kleinhenz, chief economist at the National Retail Federation, a group that represents retail stores. “When you put the pieces together – job and wage gains, modest inflation, healthy balance sheets and elevated consumer confidence – there’s an improved willingness to spend.”
The bottom line is the data continues to reinforce the fact that the US economy is gaining momentum, and much of the world is following our trend.
President Trump Keeps Promise to Reduce Regulation
People argue whether President Trump should get some or any of the credit for the economic improvement, but the business climate has no doubt changed on his watch. Corporate earnings have risen further this year, and corporate behavior has changed as measured by greater capital investment. Numerous financial writers, including some who lean left, have recently admitted that Trump’s commitment to deregulation has been a significant factor.
To put that in perspective, in President Obama’s final year in office the Federal Register – which contains new and proposed rules and regulations – swelled to 95,894 pages, according to the Competitive Enterprise Institute (CEI). This was the highest level in its history and 19% higher than the previous year’s 80,260 pages.
By comparison, the CEI reported in October that the Trump administration had slashed the Federal Register page count by a whopping 32% by the end of September. The administration has repealed hundreds of Obama-era regulations, and delayed or halted progress on many more regulations in the pipeline. It took former President Ronald Reagan several years to cut that many pages of regulations.
For too many years, many US businesses have seen mergers and acquisitions – or moving corporate headquarters out of the country for more attractive tax havens – as almost the only path to success. When a firm can’t achieve growth organically, it must acquire it. And when it faces a combined federal, state and local income tax rate of nearly 40% in America, it will often merge with a competitor in Ireland, for example. Moving a company’s headquarters to Dublin means paying only 12.5% in taxes.
Yet a lot has changed this year in anticipation of tax reform. Companies from Broadcom to Boeing have announced they’ll move overseas jobs back to the US. American companies hold nearly $3 trillion overseas and may soon be able to bring that money home without punitive taxation.
Meanwhile, businesses have begun to open up their purse strings, which is why things like commercial airline activity are rising substantially as executives seek new opportunities. Companies are once again looking to expand and focus on growth.
Controversial GOP Tax Reform Set to Pass This Week
In addition to the significant reduction in regulation, the promise of tax relief is raising expectations for growth as the US prepares to reduce the industrialized world’s highest corporate tax rate to 21%. Although the new rate is not as low as the original 15% Donald Trump called for on the campaign trail, it will make US corporations more competitive around the world. For “pass-through” businesses, which employ more than half of private-sector workers, the tax cut will have a significant effect.
By now, I doubt that anyone reading this hasn’t made up their mind on whether they are for or against slashing the corporate tax rate. Thanks to the media whining that it’s only a tax cut for “the rich,” less than one-third of Americans favor the corporate tax rate cut according to recent polls. I maintain, however, that it will be good for the economy, jobs and wages. There’s a good article in the links below that explains how cutting the corporate tax rate will boost the economy.
On the individual side, much of the tax debate has unfortunately not been about economic growth but about trying to ensure that the “rich” don’t benefit from tax reform – even though the top 10% of earners paid nearly 71% of federal income taxes in 2016. Also, the top 20% spend more than the bottom 60%, and it’s worth remembering that consumer spending is two-thirds of the economy.
I know, I know – I’m preaching to the choir. I’ll leave it there for today.
Wellesley Asset Management Webinar TODAY at 3:00 Eastern
Today we are featuring a webinar with Wellesley’s Co-Chief Investment Officer, Michael Miller. Wellesley has been investing in convertible bond for over 20 years in many different market environments. The webinar is at 3:00 PM Eastern (12:00 PM Pacific).
The hybrid nature of convertible bonds and the ability to “put” them back to the issuer can make them a good choice in both rising and falling market environments. With the markets reaching new highs nearly every day, and interest rates on their way up, it’s good to have an investment that can roll with the punches.
If you are reading this after the webinar has taken place, we will have a recorded version on our website in a couple days. Or you can call Phil Denney or Spencer Wright at 800-348-3601 for more information.
Editor’s Note: As we near the end of the year, I want to let you know that one of my goals for the New Year is to make these weekly E-Letters a bit shorter, as is the case today. In this increasing Internet Age, it seems that shorter is better. That’s what I am being told, anyway.
But I would very much like to know what you think. You are, after all, the best arbiter. I look forward to hearing from you.
Also, in case you are not a regular reader of my Blog, you definitely should read last week’s post on the subject of “Civil Asset Forfeiture.” If you don’t know about this, you really should!
Merry Christmas & Happy Holidays,
Gary D. Halbert