October 12, 2017
By: Harris L. Kempner, Jr.
We’ve changed our view that there is a roughly 50% probability of a recession beginning in the 4th quarter for the United States economy. The reason we’ve changed it is because some of the major de-stabilizing influences that worried us in the first two quarters of this year have receded to some extent, and thus won’t severely affect the economy this year. That has allowed the basic strength of the U.S. consumer and businesses to push the economy forward without the kinds of undertows and headwinds that we were concerned about. Let’s explore just exactly what we’re talking about.It really is a question of what did not happen between the first of the year and now.

A. There was no full scale repeal and replace of the ACA-Obama Care. This was a major concern in the beginning of the year because the health care system, in all of its complexities, represents an estimated 1/6th of the U.S. economy. If any of the plans that were being bruited about by the Republican House, Senate and the President of the United States had taken place, there would have been a de-stabilization of this driving force in the U.S. economy, a force that is typically growing rather than contracting. Due to two failed votes during the year, the potential of this happening in 2017 has been reduced. Even though the President is indicating that he will do what he can as an executive to undermine the ACA and provide alternatives for it, any major changes will not take place until 2018.

B. Another thing that did not happen was there was no Border Adjustment Tax (BAT). At the beginning of the year we were very concerned that there was going to be a Congressional move to tax imports and reduce taxes on all exports. This would have set up a significant confusion for the great majority of the business economy, because of the need to develop new supply chains. Multiple companies would have been impacted and the incomes of many employees would have been negatively impacted as well. Happily, in our opinion, this was conceit defeated so resoundingly, it never even came to a vote and is not part of the recent tax package. Another major de-stabilization which did not occur in the early-to-mid part of 2017.

C. And finally, the overriding concern that we had was that there would be a government default in mid-year because of the strong position of the Tea Party to increased debt. This has been fobbed off as an issue until December so it also will not affect the economy in 2017.

So without these policy concerns which would have caused massive changes in industry after industry and clear de-stabilization, we are left with a relatively strong economy which is powering through the disasters of hurricanes in four parts of the U.S., plus the wildfires in California. Disasters have a tendency to draw down the quarter in which they occur and they indicate to us that the 3rd quarter will be a relatively low performing quarter for the economy. Disasters also, however, have recovery effects in the quarter following and that means to us that those recovery efforts will spur the economy in the 4th quarter and 1st quarter of 2018. For those reasons, we are now expecting a full year of real GDP growth of better than 2% for the U.S. economy now, and we do not believe that there’s any sign of recession in the next six months at least.