KEMPNER CAPITAL MANAGEMENT, INC.
April 17, 2018
By: Harris L. Kempner, Jr.
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We continue to expect that the U.S. economy will grow by about 2 ½% in 2018. However, there now exists a real tug-of-war between strengths, weak spots and geopolitical uncertainties. Strengths continue to be job growth, increased corporate profits, and increased personal incomes.  Weak spots include trade deficits, gasoline price increases, and increased interest rates. Geopolitical uncertainties, which include trade relations with China, military actions in the Middle East and the legal trouble with the President, among others, have risen to such levels that we believe they are going to negatively affect economic decisions.  U.S. GDP growth of 2 ½% is still our best guess but we now believe it’s possible that it will be lower.

Once again, we frequently feel the need to emphasize to everyone reading this that the U.S. consumer is 70% of the U.S. economy, by far its most important factor. The hope that the tax reductions would encourage spending continues to seem more unlikely to happen. Quoting from a recent extensive BDO consumer survey, 41% of those surveyed said they saw no change in their paycheck from the tax cuts.  Further, 67% of those who participated in the survey said they would not be contributing more to the economy after taxes. Finally, 25% said they would be saving the full amount of any tax refund. This latter flanges with our previous recognition that the consumer savings rate had been very low recently, averaging about 3% for the last quarter and will need to be replenished some before the consumer will spend freely. The recent increase in gasoline prices will act as a consumer tax increase particularly affecting lower income families. The consumer continues to be a mixed bag with many cross-currents, both positive and negative. We will definitely not be a full-throated addition to the U.S. economy, as some expect.

 

On the other hand, corporations will continue to add strongly to economic growth.  Tax savings, quicker write-offs, and strong demands for goods and services within this sector will continue to underpin the economy.  This could be an unqualified strength of the U.S. economy, subject to the uncertainties we will discuss.

 

Government spending is now a short term positive due to the new spending bill, but the huge deficits will add to interest rate increases during the year, which will provide some drag as well.

 

And finally, there is specter of uncertainty and how it will affect the U.S. economy.  The uncertainties are now impossible to blink away. We believe they will negatively affect growth plans and spending plans at every level. Will we engage in an increasing trade war with China? Will the Russians retaliate by attacking the U.S. economy electronically due to the new sanctions on their economy? Will the President launch more military attacks? Will NAFTA survive? And of course, will the President and his administration be able to govern successfully due to his multiple legal problems?  Questions like these and others not mentioned will, in our opinion, have enough negative impact on the economic decisions of both corporates and individuals as the year continues to marginally slow the U.S. economy from what it could have been. They are an unmeasurable but potent economic negative.

 

To repeat, 2 ½% growth is our central number due to the factors mentioned above, but we think for the first time that it could be weaker still than that.