This article was published by The McAlvany Intelligence Advisor on Friday, June 1, 2018:
Ever since Trump’s tax reform instituted a tax holiday for the estimated $2.6 trillion being held overseas by American companies, this writer has referred to its impact once it is “repatriated” as a turbocharger on an IC engine. With no apologies to the EV crowd, a better metaphor, now that the economy is responding to those tax cuts for American taxpayers, is one of a jet engine: that repatriated capital is looking and more like an afterburner on an engine that is already at maximum thrust.
Ben Leubsdorf, writing for The Wall Street Journal, first noticed the effect. He wrote that corporate profits jumped by nearly eight percent in the first quarter of 2018, and then noted that there was a substantial pickup in capex as well: “Fixed nonresidential investment, a measure of capital expenditures, rose at a 9.2% annual rate in the first quarter, including a large upward revision for investment in intellectual property products such as software.”
Anything that grows at a 9.2% annual rate will double every eight years. At present the U.S. economy is turning out an estimated $20 trillion worth of goods and services every year. By 2026, if this very generous assumption holds, it would be turning out $40 trillion!
At the moment it isn’t doing badly at all. Consider a report by the government that the gross domestic product (GDP) came in slightly under forecast for the first quarter of 2018 at 2.2 percent annual growth, the New York Federal Reserve’s Nowcast is at three percent for the second quarter, while the St. Louis Fed’s Eco News index is predicting 3.6 percent growth with the Atlanta Fed’s Nowcast coming in at four percent.
Following ADP’s jobs report on Wednesday that the economy added 178,000 new jobs in April, forecasters are predicting that the jobs report from the Bureau of Labor Statistics (BLS) on Friday should come in close to 200,000.
Consumers are enjoying their tax cuts by spending some of them at a greater rate than many expected. The government’s Bureau of Economic Analysis (BEA) just reported that consumer spending jumped 0.6 percent in April, following hard after a 0.5 percent jump in March.
The Federal Reserve’s “beige book” – an anecdotal review of economic activity noted by the Fed’s 12 regional banks – showed the U.S. economy “shifted into high gear” last month despite concerns over Trump’s tariffs. The Fed noted: “Contacts noted some concern about the uncertainty of international trade policy. Still, outlooks for near term growth were generally upbeat. Economic activity expanded moderately in late April and early May, with few shifts in the pattern of growth.”
Leo Nelissen, an investment advisor writing for Seeking Alpha, looks at five regional banks’ surveys every month and then combines them into a report to his clients. Every one of them remains strong, with “sub-indicators” (i.e., new orders, shipments, employment, prices, and future capital expenditures) showing continued improvement, with one regional index (Kansas City’s) reaching a new high. New orders remain robust with shipments reflecting them. Said Nelissen, “We are seeing one of the biggest increases [in shipping activity] since the start of the upswing in 2016 … indicat[ing] further strength for the U.S. transportation industry.”
Regional manufacturing employment “almost made a new high in May after starting in impressive rally in 2017,” added Nelissen.
It’s hard to find anything negative. Even suggestions that job growth has slowed a little is because the economy is slowing are laughable. Any slowing in job growth may be due to a shrinking in the number of couch potatoes and welfare check dads on the sidelines. Employers are raising wages to coax them off the sidelines, not a sign that the economy is faltering.
Every stock market climbs a “wall of worry” and 2018 is no exception: tariff disputes, OPEC interference, North Korean intransigence, relentless attacks on the first American president in the White House in eight years – none of which seem to have dented the economy’s extraordinary recovery from the Obama years. With the repatriation of even part of that $2.6 trillion residing overseas, it is going to serve as an afterburner on a jet engine already generating maximum thrust.
The Wall Street Journal: Corporate Profits Boosted in Early 2018 by Tax Cuts
MarketWatch.com: Consumer spending surges for second straight month
FXStreet.com: US economy on track – AmpGFX