Donald Trump could use this tweak to unlock ‘trillions of dollars’ worth of investment in the US
‘US tax reform plans should provide a shot in the arm for the US economy if they can be pushed through’
“We’ll be having a big announcement on Wednesday having to do with tax reform,” said US President Donald Trump on Friday. In truth, speed is of the essence as warning lights begin to flicker on the dashboard of the US economy.
United States retail sales fell for a second month in succession in March, down 0.2 per cent after a 0.3 per cent drop in February. The US consumer price index (CPI) fell 0.3 per cent in March, the first fall in 13 months and the biggest drop since January 2015.
As a consequence of more mixed US economic data Japan’s Bank of Tokyo-Mitsubishi UFJ noted, on April 19, that in 2017 “the probability of two further rate increases by the Federal Reserve has now completely evaporated.”
Consultancy firm McKinsey may have warned last week of “a looming interest rate storm” for Chinese banks, arguing that China is “very likely” to have entered a rate-increase cycle to better cope with US rate rises, but markets have currently dialled back US rate rise expectations.
Of course markets can be fickle, and a couple of poor retail sales figures and a single monthly drop in consumer prices won’t necessarily deter Fed policymakers, but there are other signs, too, that all may not be well with the US economy. Some might even question whether the US economy can actually bear much higher interest rates.
American households are awash with debt that only becomes more expensive to service as interest rates rise.
The Federal Reserve Bank of New York calculated in February that as of the end of 2016 total US household indebtedness was US$12.58 trillion just 0.8 per cent beneath its peak of US$12.68 trillion reached in the third quarter of 2008.
Credit card charge-off rates by banks have been ticking higher. For example, Bank of America’s charge-off rate ticked up to 3.06 per cent in March from February’s 2.4 per cent. Given that aggregate credit card debt in the United States hit US$1 trillion in December 2016, for the first time since December 2008, higher charge-off rates are not immaterial.
Additionally, on April 3 New York Fed chief William Dudley drew attention to the growth in aggregate US student loan balances which reached US$1.3 trillion at the end of 2016 and are 170 per cent higher than they were in 2006.
Dudley noted that even though the US jobs market has improved in recent years, overall student loan delinquency rates “remain stubbornly high” and the pace of repayments has slowed.
There may also be an issue with auto loans. Ratings agency Fitch said on April 6 that it expects more credit problems to show up in US auto lenders’ portfolios this year.
Taken individually, it could be argued that these disparate factors mean little in the face of continuing buoyant US job creation. But taken in the round, it may be that such data cast doubts on the idea that all is well under the bonnet of the US economy and that the Fed can continue hiking rates without damaging domestic economic prospects.
On a comparative basis, it’s worth noting that China’s economy expanded by 6.9 per cent in the first quarter of 2017. The International Monetary Fund has concluded there are “upside risks” to their already upgraded 6.6 per cent forecast for Chinese growth for the year as a whole. Yet in the United States, the Atlanta Fed has lowered its first-quarter US gross domestic product estimate to 0.5 per cent.
If that forecast plays out, it would represent the weakest US quarterly performance in three years and stand in sharp contrast to the 2.1 per cent growth rate seen in the final three months of 2016.
Against such a backdrop, launching a trade probe on steel imports predicated on national security issues, as Trump announced on Friday, might play to his electoral base but it’s probably not going to kick-start US economic growth.
But US tax reform plans should provide a shot in the arm for the US economy if they can be pushed through. Details remain thin but US Treasury Secretary Steven Mnuchin did speak last Thursday of making US business taxes competitive so that US firms bring home “trillions of [US] dollars” to invest, money that is currently held offshore.
While most observers would still argue that the engine of the US economy is ticking over nicely, in truth, there are plenty of warning lights flickering on the dashboard. A substantive US tax reform package cannot come quickly enough.