April 17, 2017
By: Harris L. Kempner, Jr.
In January, we believed that there was a high probability that we would be entering a recession in the last quarter of 2017. In our opinion, the last three months have provided more data which confirm this analysis.
You will recall in January we pointed out the recovery was ageing, that there were stresses in terms of higher interest rates and labor price increases beginning to appear but that the tipping point into recession would likely be new economic uncertainties from potential new government, particularly Congressional, policies. There is evidence of uncertainties happening now. Despite strong levels of consumer and business optimism, retail spending actually decreased in both February and March from the preceding month. First quarter 2017 looks to be only about a 1% GDP growth.
Note that healthcare is roughly 20% of the U.S. economy. The continuing chance that there will be large scale changes in the laws governing the system has continued to impact many growth decisions by medical insurance companies, hospital companies and drug companies.
Many people, as we mentioned in January, believed at the start of the year that taxes would be lowered in 2017. We believed otherwise. As of now, expectations are clearly for tax changes in 2018 at the earliest. Many of the plans that might have been made for capital improvements and expansions and personal decisions about investments have all been held in abeyance by the uncertainties surrounding the timing and specifics of potential tax changes.
Finally, the Border Adjustment Tax, which we felt would require a massive change in doing business and extraordinary difficulties for many people up and down the supply chain, is still alive and kicking. However, it has also been joined by a brand-new concept, which may be more Presidential than Congressional, a new concept called a Reciprocal Tax. This new concept is defined by the President roughly as “whatever duty they charge us for what they import from us, we will charge the same for what we import from them”. Thus, reciprocal. It would, at the very least, massively increase prices for consumers throughout the chain with no offsets that one can see. The possibility of that plus the Border Adjustability Tax has caused, as we expected, substantial delays in decisions for corporate growth.
Finally, of course, there is a heightened possibility of new shooting wars in Korea which is beginning to impact growth-oriented economic decision-making. The concern about it is causing even more hesitation. All in, we still hold to a better than 50% probability that we will be in recession by the fourth quarter of 2017.
We expect those economic uncertainties will sufficiently reduce the animal spirit of corporations and of consumers over the year to most probably tip a slow growth economy into recession by end 2017. So, those who believe that this optimism that you see now is going to carry over into all of 2017 and positively dominate the year, are likely mistaken. I believe that we are facing a very tentative economic future as many of the new set of policies are proposed, and some adopted. Change can be destructive, as well as positive, particularly in the short term.