July 19, 2017
By: Harris L. Kempner, Jr.
This quarter we reiterate the same theme concerning the U.S. economy that we gave you in the last two quarterly reports. We continue to think there will be a gradual slowdown in business and consumer activity during the year, which will lead to about a 50% chance of entering a recession by the fourth quarter.As background, the 1st quarter GDP growth was an anemic 1.4%. Early projections for the 2nd quarter ended June 30th were for a snap-back to 3% growth or more. Gradually these projections of growth have come down and as of now the most recent for the U.S. 2nd quarter GDP by the NY Feds NOWCAST is as low as 1.9%. This is a pattern of optimism versus reality that we expect to occur as the year goes on.
But why? After all, the stock market is at new highs, there is continued good job creation, consumer income is up, and inflation is low. Despite this, the major factor causing drags on actual U.S. business and consumer activity, in our opinion, is massive policy uncertainty concerning major pieces of our economy. This uncertainty in turn has caused negative feedback on decisions to purchase, decisions to hire, and capital expansion decisions. This, we believe, will worsen till these policies are resolved.
Specifically: The battle to change the ACA is, after all, a battle to change the 1/6 of the U.S. economy devoted to health care – insurance companies, hospitals, clinics, drug companies and individual consumers of health care are all somewhat paralyzed as Congress pinballs from one failed bill to another. Furthermore, we’ve just been greeted with President Trump’s statement that he should just allow the ACA to “fail”. He has levers that he might use to do this, particularly if he attacks the subsidies that permit the millions of people to buy health care insurance these days. This uncertainty surrounding medical care has affected all the above players and is a serious factor in the economy at this point.
In addition, the ACA debate has delayed work on even more fundamental economic policies. No one knows what, if any, tax cuts or “reforms” might take place. At the start of this year, optimism was very high that there would be substantial reductions in both taxes and in many tax constraints on business that would take effect in 2017. Now no one knows, and business leaders across the economy are waiting to find out before they take what would be normal economic growth opportunities. Any chance of a bill affecting taxes in 2017 seems negligible, and even 2018 is doubtful. Further, the Republicans are presently talking about a tax bill that would be revenue neutral rather than increasing the deficit. If they stick to that, we project there will be very little or no tax decrease possible and therefore a major prop to economic optimism will be taken away.
There is no infrastructure bill in sight, yet the infrastructure investments were a significant promise for construction and other businesses. They won’t gear up for major expansion on this until an infrastructure plan is passed. Hesitation, again.
And finally, there’s an economic danger with the policy of inaction and that is the question of whether the U.S. Congress will be willing under these circumstances to provide a bill which will permit the U.S. government to pay its debts as we reach a debt ceiling in September and October. Of course if we don’t do that it would be a significant detractor worldwide of any economic growth and would absolutely guarantee the unbalancing of world-wide economics systems. The world depends upon the full faith and credit of the United States as exemplified in U.S. Treasuries. They are the major reserve, investments, and figure in all the world’s economic activities. A failure to meet those obligations because of political pressures from one side or the other would help cause not just a U.S. recession, but a world-wide recession. Another uncertainty that is reducing economic activity.
As the year in policy-making has ground on into inaction, we believe the lack of decisions and the uncertainty about what decisions will be made are increasingly weighing into business decisions concerning expansion and also into consumer spending on which the U.S. economy very much rests. For example, along with others, retail sales were soft in June, particularly in autos. Some manufacturing indexes, such as the Empire Index (NY) and the Philadelphia Fed Index were significantly lower than estimates. Despite optimistic stock markets and consumer confidence, we think these “hard” economic data points are the beginning signs of a gradual slowdown and perhaps a tipping into negative growth will take place during the rest of this year.