Economic Insights - December 2018

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Moderately strong U.S. economic growth continues as we near the end of the fourth quarter, despite the sagging global economy.

The Conference Board Leading index report rose 0.1 percent to 112.1 in October, another record high.  That follows a revised 0.6 percent increase to 112.0 in September.

In the past fifty-years, the Leading Index has peaked and begun to decline a median of 10 months before each recession.  So, it’s safe to say, a genuine U.S. recession in the next year is highly unlikely.

Looking backward, the first revision of third-quarter GDP came in, as expected, 3.5 percent.  That’s quite good given the pressure on exports.

The biggest reason growth has accelerated is because lower tax rates, and less regulation increased business activity.  Incentives for businesses and investment drive growth.  It is the supply of new goods and services that leads to faster economic activity.  In this case, the tax cut led to better incentives to invest, work, and invent.  As long as tax rates remain low, a “permanent” change has been started, which will boost growth rates for quite some time.  The “fading impact” many are talking about won’t come to pass, though it will soon become just another part of the new pro-business context.

As an example of how important a pro-business agenda is, let’s look at this example.  Before the tax cut, the corporate tax rate in the U.S. was approximately a combined 40 percent (including federal, state, and local taxes).  In 2017, Canada had a corporate tax rate of 26.5 percent.  So, there was quite an incentive to invest in Canada over the U.S.

Now the combined U.S. corporate tax rate is approximately 27 percent, radically changing incentives. At the margin, as long as tax rates stay where they are, there is a permanent incentive to invest more in the U.S.  This, by itself, does not mean GDP growth will accelerate from where it is now (averaging just over 3 percent), but it helps ensure that growth will not “revert back” to the 2 percent average we experienced in the dark days from 2010 to 2017.  Yet, that is what we are all being told by the pandering pundits of pessimism on TV.  This thesis is also being priced into most economic...

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