Neither consumers nor corporations are going to lead the US to the land of economic booms. From Lance Roberts at realinvestmentadvice.com:
On Tuesday, I presented at the Financial Planning Association (FPA) Conference in Houston at which I discussed the issues surrounding financial planning in an environment of high valuations and low forward returns. After my presentation, a few CFP’s approached me to discuss the premise that recent “tax cuts/reforms” will lead to a resurgence of economic growth which will boost earnings and therefore negate the overvaluation problem.
This is unlikely to be the case and something that I discussed recently in “There Will Be No Economic Boom.” However, that article focused on the impact of the passage of the 2-year “Continuing Resolution” which will lead to a surge in the national deficit as unconstrained spending negates the effect of “tax reform” on the U.S. economy.
But there is more to this story.
When the “tax cut” bill was being passed, everyone from Congress to the mainstream media, and even the CFP’s I spoke with yesterday, regurgitated the same “storyline:”
“Tax cuts will lead to an economic boom as corporations increase wages, hire and produce more and consumers have extra money in their pockets to spend.”
As I have written many times previously, this was always more “hope” than “reality.”
Let me explain.
The economy, as we currently calculate it, is roughly 70% driven by what you and I consume or “personal consumption expenditures (PCE).” The chart below shows the history of real, inflation-adjusted, PCE as a percent of real GDP.
If “tax cuts” are going to substantially increase the growth rate of the U.S. economy, as touted by the current Administration, then PCE has to be directly targeted.
However, while the majority of consumers will receive an “average” of $1182 in the form of a tax reduction, (or $98.50 a month), the increase in take-home pay has already been offset by surging health care cost, rent, energy and higher debt service payments. As shown in the table below – the biggest constituents of the “non-discretionary family budget” are rising the most.
So, since tax-cuts, by themselves, are unlikely to offset rising prices of essential goods and services it’s hard to see how they fuel a significant surge in consumer spending.
To continue reading: There Will Be No Economic Boom – Part II
