Trump’s Tax Cuts Won’t Offset the Impending Slowdown

Summary: American elections often turn on recent economic growth. So Trump’s future, the GOP’s future, and perhaps the course of US politics might depend on the what the economy does during the next three years. Here one of the world’s top forecasting firms looks at our future. They see slowing growth, which Trump’s fiscal stimulus (i.e., tax cuts => larger deficits) will not offset.

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Trump’s Tax Cuts Won’t Offset the Impending Slowdown.

By Lakshman Achuthan and Anirvan Banerji of ECRI.
From Bloomberg on 25 January 2018.
Reposted with their generous permission.

Market-oriented economies such as the U.S. are inherently cyclical, and there are warnings of a cyclical slowdown in 2018. Yet this view is at odds with the increasingly optimistic consensus that economic momentum, turbocharged by President Donald Trump’s tax cuts, will sustain the upswing throughout the year.

The notion that momentum propels economic expansion — and is therefore a good way to forecast growth — is often valid away from cycle turning points. This is why extrapolating recent trends is a popular basis for forecasting growth. The exception, by definition, is at cyclical turning points, when momentum reverses. This is when gross domestic product consensus forecasts systematically exhibit their largest errors. (See “How Reliable Are GDP Consensus Forecasts?“)

Overshoot of GDP Forecasts during the business cycle

Good leading indexes are designed to signal when the risk of a turning point is high, or when some of the biggest GDP forecast errors are likely. Lately, growth in the Economic Cycle Research Institute’s U.S. Short Leading Index, which we recently highlighted, has been “pointing to a U.S. growth rate cycle downturn.” (See “Bond Markets Really Are Signalling a Slowdown.“)

Prospects for a slowdown have not changed despite an even more upbeat consensus. In turn, this optimism has supported a record-breaking rise in stock prices to start the year.

The cheerful sentiment is driven by expectations the tax cuts will provide a lift not only to profits, but also to economic growth. But business investment growth in the year after tax cuts has actually been shrinking since the 1960s; President George W. Bush’s tax cut was followed by less growth than occurred after President Ronald Reagan’s tax cut, and even less than after those signed into law by President Lyndon Johnson. In any case, most estimates of the boost to overall growth from the Trump tax cuts in 2018 are in the range of some fraction of 1% of GDP.

Nevertheless, virtually everyone, including ECRI, agrees that the tax cuts will provide at least some economic boost, following the cyclical upturn during which year-over-year GDP growth probably doubled by the end of 2017 from the three-year low of 1.25% in mid-2016. The question is if tax cuts can offset the cyclical slowdown that is likely to follow.

Since the last recession, the U.S. has had three cyclical slowdowns, in 2010-11, 2012-13, and 2015-16. As the chart shows, those downturns typically reduced year-over-year GDP growth by a couple of percentage points.  (Click to enlarge.)

The point is that such slowdowns tend to cut GDP growth by quite a bit more than the expected gain from the tax cut.

Looking elsewhere, could the synchronized upturn in global growth help sustain U.S. growth momentum? In theory, yes, but ECRI’s international leading indicators also point to slowing growth ahead. In fact, the growth rate of ECRI’s international long leading index — which, a year ago, correctly proclaimed the “brightest global growth outlook since 2010” — has turned down, delivering a clear message. Cyclical forces are in no position to sustain the synchronized global growth upturn that has gone on for more than a year.

Not that global growth has been providing a major tailwind for U.S. growth. Even with synchronized global growth in full swing in 2017, U.S. net imports of non-petroleum goods over the past 12 months were larger than ever. (See “Key Trade Data Shows Fast-Worsening Deficit.“)

Despite hopes that economic growth momentum from 2017 can be sustained through 2018, a slowdown is likely to take hold this year. Perhaps this is part of the message from bond market yield spreads. And even as tax cuts support growth, they will, at best, mitigate that slowdown — a far cry from current expectations.

Looking at the data, past and future

Looking back: year-over-year growth. Do you see the boom?

Real US GDP - % change YoY

Look more closely at the past, at quarter-over-quarter growth. Do you see the boom?

Real US GDP - % change YoY

Look at the future using ECRI’s indexes (through 19 January 2018). See more here.

ECRI indexes

The Atlanta Fed’s GDPnow forecast for Q1 real GDP.

A fever for America: Economic growth skyrockets, driven by collapse of household saving and a rising Federal deficit. The forecast for Q1 of the Atlanta Fed’s GDPnow model is 5.4%.

Atlanta Fed's GDPnow forecast for Q1 real GDP.

About business cycles

Business cycles: we had these nice cycles in the good old days.
These neat cycles might be a thing of the past, in an era of zero or negative real rates.

The Business Cycle

About the Economic Cycle Research Institute

The ECRI is an independent research institute. Their indicator systems predict the timing of changes in an economy’s direction, before the consensus of economists. It is one of the three best-known non-government publishers of leading indicators, along with the Conference Board and the OECD. The ECRI’s co-founder was Geoffrey H. Moore.

”In a sense, he was the father of the leading indicators as we know them today,” said Anirvan Banerji, co-director of research with Dr. Moore at the ECRI. The successor to the forecasting tools he developed is ECRI’s Weekly Leading Index (WLI). From 1949 to 1978 Moore set the start and end dates of recessions for the National Bureau of Economic Research (NBER). When they created a committee for this, he was its senior member. Using the same approach, ECRI has long determined recession start and end dates for 20 other countries that are widely accepted by academics and major central banks as the definitive international business cycle chronologies.” (From his March 2000 NY Times obituary.)

For information about their methodology, see their About pageLearn about their services at their website.

For More Information

Ideas! For shopping ideas, see my recommended books and films at Amazon.

If you liked this post, like us on Facebook and follow us on Twitter. See all posts about economic growth, about secular stagnation, and especially these…

  1. Ignore the skeptics. America can still grow.
  2. Today’s mythbusting: the Fed is not suppressing interest rates.
  3. Did anyone predict the 2008 crash? Will anyone predict the next crash?
  4. WWI warns us about markets’ ability to see the future.
  5. See the mystery of US GDP, and understand ourselves better.

To better understand what lies ahead for America…

I recommend reading The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War by Robert J. Gordon (Prof economics, Northwestern U). From the publisher…

The Rise and Fall of American Growth
Available at Amazon.

“In the century after the Civil War, an economic revolution improved the American standard of living in ways previously unimaginable. Electric lighting, indoor plumbing, motor vehicles, air travel, and television transformed households and workplaces. But has that era of unprecedented growth come to an end?

“Weaving together a vivid narrative, historical anecdotes, and economic analysis, The Rise and Fall of American Growth challenges the view that economic growth will continue unabated, and demonstrates that the life-altering scale of innovations between 1870 and 1970 cannot be repeated. Gordon contends that the nation’s productivity growth will be further held back by the headwinds of rising inequality, stagnating education, an aging population, and the rising debt of college students and the federal government, and that we must find new solutions.

“A critical voice in the most pressing debates of our time, The Rise and Fall of American Growth is at once a tribute to a century of radical change and a harbinger of tougher times to come.”

 

9 thoughts on “Trump’s Tax Cuts Won’t Offset the Impending Slowdown

  1. Good read.

    The tax cuts will indeed have a very marginal effect on the economy and in particularly households. Business and small ones in general will benefit a great deal.

    Martin Feldstein, said the other day, that he expects an increase in inflation and no growth of GNP past 3%for the next decade!

    Federale spending needs to be sharply reduced.

    As for the Atlanta Fed’s GDPnow model, it is so inaccurate that they should release their projections during SNL.

    Going forward over the next four years, I see national growth between 2.7% and 3.4%.

    This is still since 2000, a fedomomy and little else and shall remain so until we have “nominal” interest rates. The FRB, is currently and unfortunately, the gatekeeper.

    1. Bill,

      (1) Making long-term economic forecasts is beyond the state of the art. So take Feldstein’s forecast with some salt.

      (2) “Going forward over the next four years, I see national growth between 2.7% and 3.4%.”

      Your odds of making better forecasts than pro economists (I assume you aren’t one) are about the same as you being able to play NFL-level football.

      (3) “As for the Atlanta Fed’s GDPnow model, it is so inaccurate that they should release their projections during SNL.”

      It’s track record shows that it is roughly as accurate as the consensus of economists (i.e., better than most). It’s certainly better than yours.

      (4) “Federale spending needs to be sharply reduced.”

      No, it doesn’t.

      (5) “This is still since 2000, a fedomomy and little else and shall remain so until we have “nominal” interest rates.”

      Zombie economics. See “Today’s mythbusting: the Fed is not suppressing interest rates.”

  2. Mr Kummer, thank you for your reply. You are witty and concise in your replies.

    “(1) Making long-term economic forecasts is beyond the state of the art. So take Feldstein’s forecast with some salt.”

    I do with a pinch of pepper.

    “Your odds of making better forecasts than pro economists (I assume you aren’t one) are about the same as you being able to play NFL-level football.”

    Not so, since the former is based upon conjecture and latter is strictly performanced based. I would suggest that many economists would be cut after training camp.

    “(3) “As for the Atlanta Fed’s GDPnow model, it is so inaccurate that they should release their projections during SNL.”

    It’s track record shows that it is roughly as accurate as the consensus of economists (i.e., better than most). It’s certainly better than yours.”

    John Crudele of the NY Post and Forbes are supporters. Not so much in camp is Mike Mish.

    I will pay more attention to the Milanta Index, per your comments. I shall also reaffirm their current offer of “Latest forecast: 5.4% — February 1, 2018” will be wrong by as much as 100-125 basis points. But then I am just a home economist, with no data flow.

    “(4) “Federale spending needs to be sharply reduced.”

    No, it doesn’t.”

    If you want growth it is. Much of governmental unit spending is unproductive. It should not even be included in GNP figures since they little less than transfer payments.

    As to FRB controlling interest rates, which I did address with Collen Roche and others: I will need to read your link and find additional time.

    1. Bill,

      (1) “Not so, since the former {the GDPnow model} is based upon conjecture and latter {Bill’s} is strictly performanced based.”

      That is quite a combination of ignorance (about the GDPnow model) and wild self-confidence.

      (2) “John Crudele of the NY Post and Forbes are supporters. Not so much in camp is Mike Mish.”

      First, the forecasting records of models are evaluated by math — not testimonials. Second, neither a journalist nor blogger has any competence to do so.

      (3) “If you want growth it is.”

      You’re just making stuff up. I suggest starting with an Econ 101 text.

      (4) “Much of governmental unit spending is unproductive. It should not even be included in GNP figures since they little less than transfer payments.”

      That shows a profound ignorance of what GDP measures, and the concept of a “transfer payment.” Check that Econ 101 textbook.

      (5) “As to FRB controlling interest rates, which I did address with Collen Roche and others”

      I suggest talking to economists about economics. You have not cited a single actual authority in your comments, which is (guessing) why they have so much misinformation. Change that and you will be on a new road, and a better one.

  3. The economy is heading for unchartered waters. Financialization is gutting companies from within. Public companies have been outsourcing and divesting inhouse research, and via mergers concentrating industries.
    See:
    https://washingtonmonthly.com/magazine/novdec-2015/bloom-and-bust/
    Bloom and Bust
    Company executives are using stock buybacks to artificially inflate stocks.

    Please also check out the ProMarket blog of the Stigler Center of the U of Chicago.
    https://promarket.org/promarket-blog-policy%E2%80%8B/

    And see what Clayton Christensen has been saying.

    https://www.forbes.com/sites/stevedenning/2011/11/18/clayton-christensen-how-pursuit-of-profits-kills-innovation-and-the-us-economy/#2032d2ae28eb
    Clayton Christensen: How Pursuit of Profits Kills Innovation and the U.S. Economy

    Presentation at Gartner hosted event

    http://gartner.mediasite.com/mediasite/play/9cfe6bba5c7941e09bee95eb63f769421d?t=1320659595

    Npow major demographic upheaval is underway as Boomers exit the scene. Most have little or no savings; and behind them are progressively weaker generations. The ones currently in public schools are mostly “low income” a euphemism for poor.

    For where US is heading check out how British business has declined under financialization:

    https://www.standard.co.uk/business/anthony-hilton-british-business-and-what-went-horribly-wrong-a3640336.html

    Anthony Hilton: British business and what went horribly wrong

    Will US Govt and policymakers change status quo or follow the UK?:

    “In this respect, Britain has echoes of other declining nations over the centuries – Venice in the 16th century, Spain in the 18th, Austria-Hungary and France in the 19th. All knew full well that their political, economic and social systems had become dysfunctional, but reform was impossible. Too many at the top had stakes in the old order, reinforced, as in today’s Britain, by being at the apex of the social pyramid.”

    https://www.theguardian.com/commentisfree/2017/sep/09/do-we-have-will-to-reform-society-or-are-we-in-terminal-decline

    Like fading powers of the past, Britain shows signs of being in terminal decline
    The case for reform is plain to see but it won’t happen because too many at the top have stakes in the old order

  4. Now that public companies are divesting their inhouse research, it more important that US spend less on defense R&D.

    “On a per GDP basis, Korea invests 89 times more than the US on industrially-oriented research, Germany 43 times more, and Japan 15 times more”

    http://www2.itif.org/2017-new-era-rd.pdf?_ga=2.112382276.1133110559.1516415283-1582836618.1516415283
    A New Era in US R&D Policy? Explaining the Decline In U.S. Government R&D Intensity

    Since the 1960s, focus on defense has bee gutting US companies,

    William Polk
    “What happened was that we turned our skills and investments to military production:

    in the 1950s and 1960s, we were superb in weapons and space-related production but could no longer compete on civilian

    goods.

    We stopped trying to make many things our people wanted and were buying.

    Even those things we put out under American labels, like TV sets, were often just American wrappers on Asian components..”

    http://www.williampolk.com/pdf/2008/Talk%20at%20Bennington%20College%20students%20and%20faculty.pdf
    Talk at Bennington College students and faculty on September 15, 2008

    Seymour Mehlman

    “In fact deterioration in the production competence of U.S. industries had been well under way since 1960 and was reported in some detail by 1965.”

    http://ejournals.library. vanderbilt.edu/index.php/ ameriquests/article/view/127/ 136

    Financialization has accelerated process.:

    1. Winston,

      You’ve been posting this declinest stuff here for at least five years — during one of the longest economic expansions in US history. I suggest that you reconsider your thinking. It’s a declinest mind-set, an idée fixe.

      As your for collections of bad news, you could assemble that from every year since forever. If you want to see a world without warts, just wait! When you die and go to Heaven, you will find a place where the news is always good news.

    1. Bill,

      I’ve done that with comments. Maddening.

      Additional comment, context — American’s excessive self-confidence might sink us faster than opiods. Everyman thinks he is a climate scientist, economist, or whatever expert is trendy. Worse, they often think they’re better experts than people who have had years of professional training and experience. This is madness.

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