The following article by Andrew Soergel was posted on the U.S. News and World Report website March 30, 2018:
The benefits of the nation’s new tax code haven’t cropped up in much economic data so far this year.
GOP LAWMAKERS BROUGHT in 2018 with a $1.5 trillion tax overhaul that upended the burdens individuals and corporations owe to the Internal Revenue Service each year.
The legislation heaped new debt onto a country already saddled with more than $20 trillion in outstanding obligations. But the overhaul was touted as an economic growth engine likely to drive investment and wage growth in America, eventually allowing the cuts to pay for themselves by virtue of a stronger economy.
Few expected the tax tweaks’ potential benefits to surface immediately. And, indeed, their impact through the first quarter of the year has been muted, according to Mark Hamrick, the Washington bureau chief and senior economic analyst at Bankrate.com.
But Hamrick is quick to point out that it’s only March. And although the tweaks have been criticized for driving stock buybacks and one-time bonus payments rather than stimulating long-term wage increases, Hamrick says he’s optimistic that the legislation will contribute to increased consumer spending down the road – and will hopefully help bolster Americans’ lackluster savings accounts.
U.S. News spoke with Hamrick to hear his take on how the new tax legislation has already impacted the economy and how things are likely to evolve going forward. Excerpts:
Where do you think the economy stands after the first three months of the year?
Even though first quarter GDP seems like it won’t hit that 3 percent mark – that’s sort of the consensus right now, that it’ll be around that 2 percent range – expectations continue to be on the optimistic side that we’ll see some resurgence in the second quarter.
Has the new tax legislation been much of a factor?
The benefits of the income tax cut are really only now really beginning to hit and have yet to really show up in any significant way in spending figures or retail sales. It’s been estimated that, probably, the annual impact of all of that is somewhere north of $100 billion. And all of that money needs to go somewhere, so some of that will move into the spending category.
But we’re advocating on behalf of consumers and investors that they need to be thinking about how to maximize their finances so that they’re taking advantage of saving opportunities and to pay down debt. Our data continues to indicate, by virtue of our surveys, that many Americans could do a better job of saving money.
There’s been a lot of talk about lower tax rates driving more consumer spending. But you’d also like to see Americans stash some of that cash away?
Absolutely. Right now, we do see the benefits of the tax cut coming into individuals’ and corporations’ coffers. But as one who came from the Midwest, I’d seize upon a corny line and say “You need to make hay while the sun shines.” We’re in the ninth year of the economic expansion, and the bull market is nine years old as well. And these things will not last forever.
Individual situations vary, broadly speaking. But now is the time to really be doubling down on saving, whether it’s for retirement, emergency savings, for those who have children who might be college-bound, because, by most measures, the economy is firing on many cylinders. And this is not something that can be guaranteed down the line.
And we’re in a rising interest rate environment, where the cost of borrowing is rising and likely to rise. And with inflation picking up, all of those things will be adding a degree of tension to savers. So we should be taking advantage of the opportunities we have now.
Some have criticized this legislation for driving stock buybacks instead of filtering into wage gains. Are you seeing that?
It may well be the case. I’d want to take a closer look at the data to see what’s actually happening. But we know anecdotally that some of the intentions stated by executives indicate that it would be wrong to assume that all of this money translates to annual wage increases for a substantial number of workers. What has been the case so far is that it appears to have favored one-time bonuses.
Certainly, the opportunity for share buybacks is something that helps the market. But the more macro outlook and the performance of the economy and profitability are going to be among the things that drive market performance. Buybacks by themselves are not going to be enough to sustain a rising market over time.
Going forward through the rest of the year, where are the tax cuts’ impacts likely to crop up?
Obviously, you’ll see some support given to consumer spending. We would hope some of the money would end up in consumer savings, though that is probably not what some of the retailers and the people promoting spending would like to see. But many Americans’ savings is just not where it needs to be.
The prospect of the tax cut benefits are obviously providing some underpinning for hiring. That has been seen as a positive trend in the employment data so far in 2018. There was obviously a big upside surprise in the last jobs report.
And, ultimately, the real fear that nobody can answer definitively is whether we’re bringing a lot of economic activity forward that’s known to be late in the economic cycle. We don’t know whether it’s the sixth inning, the seventh inning or the top of the ninth.
Inflation also seems like it’s being discussed more as a potential economic risk. Are you worried yet by what you’re seeing from inflation data?
Central banks and the Federal Reserve need to be vigilant about the risks of inflation, but inflation has long been predicted but has underperformed. And I think that continues to be the case with the lack of sustained wage growth. The average hourly earnings piece of the most recent employment report didn’t have the same strength as the previous report.
I think at this point, we’d be better to think that inflation remains a risk but to not be fearful. There’s no indication yet that inflation is truly a threat. But, of course, with the uncertainty surrounding the trade outlook, it certainly does remain a significant risk from a Trump administration policy standpoint. I think there are some signs of that being seen in import prices. If we really did see some burgeoning signs of more rampant protectionism and retaliatory moves by other countries around the world, that injects a new dynamic into the inflation outlook that we haven’t really had to look at before. If you’re monitoring risks, you have to count that among the risks.
View the post here.