The US Economy As Of November 2017

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The US Economy as of November 2017

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The US Economy as of November 2017

The US economy has come since November 2017 to a critical junction to be resolved in

one way or another within the coming days, giving a particular drama to this essay, along with a

sense of uncertainty, given that events are still in play and conflicting reports are issued.

Decision concerning the tax reduction which takes over a trillion dollars out of taxation revenue

is about to be made, leaving behind the question of how the trillion dollar investment President

Trump also promised as candidate for the infrastructure would be fulfilled. How these two

initiatives, the tax reduction and the possible rise in interest rates are linked since November of

this year is the underlying theme of this paper,

The essay begins by studying the US economy which in the reporting and analysis

reflects an odd contradiction, promoting seemingly simultaneously positive and negative

conclusions about its overall health. That contradiction will be studied specifically with regards

to the housing sector in order to make a distinction between an economy tied to the stock market

and concerned with buybacks, mergers, and investment profits and the “real” economy of

production and consumption, of wages and consumer relations within a system of production and

distribution. We turn then to assess the tax reform that may be passed or rejected in the coming

days, and set it against the possible rise of interest rates. The underlying argument is that the two

are closely related.

Until the fall of 2017, the stock market had reacted with horror and a rush to the exit at

the slightest whisper that the interest rates set at zero allowing for massive transfer of funds to

corporations will be raised. The current willingness to accept a rise in rates, it will be argued, is

related to the trillion or so of investment capital supporting the already huge profits corporations

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make from various stock market schemes, for the relative lack of profitability of their core

operations.

Based on the pledged tax reform by the Trump administration, a firming up of the

housing market and a seeming strengthening of employment, the Conference Board issued a

monthly consumer confidence index which remained high through November, indeed at its

highest since the year 2000, surpassing market expectations which expected a small dip, not a

fifth consecutive month of stronger confidence.

Fig. 1 Monthly Confidence Index Source: The Conference Board

The significance of that increase in the index from 126.2 to 129.5 may be gauged against

a 100 point threshold employed as base measure. There may be expected, the Conference Board

affirms, higher holiday spending and an increased confidence in our economic future. Clearly, it

is possible to see in the generally positive indicators signs of that recovery from the 2008

recession which was the Federal Reserve’s narrative and the basis of that rise in interest rates that

has been debated for years, but never enacted.

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The housing market is a particularly good indicator of the health of the real economy of

jobs and wages in contrast to another economy founded on mergers, acquisitions and buybacks.

There is, for instance, the building of houses and speculations on them as an example of different

systems within the same system, but pulling now in opposite directions. For example, the

S&P/Case-Shiller 20-city composite home price index continued its gains by 0.4% in September,

which mirrored the increase recorded in August (Ampudia, 2017). There was in October a

meaningful recovery from the interruption of Hurricanes Harvey and Irma. Indeed, as the

following chart indicates, housing starts had not been that high since precisely a year earlier in

2016.

Fig 2. US HOUSING STARTS AT 1-YEAR HIGH SOURCE : US CENSUS BUREAU

Still, another and more disturbing picture of the situation emerges if we look closely at

steep fall in housing starts from month- to month, described typically as “unexpected” ,which

brings up the possibility of unknown or unacknowledged negative factors beneath the positive

picture. In fact, sales listings have plummeted. As well, it was established that prices are rising at

a steady pace, far outstripping wages, despite the generally positive narrative of recovery

promoted by the Federal Reserve, setting immense obstacles on the path of home ownership

Now, in October, the government issued an unemployment report proclaiming 228,000 jobs

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created which was beyond the expectation of forecasts, and proclaimed as a promise made before

the election to Trump’s supporters. Left out of the picture is the necessary conclusion to be

drawn when wages rise at a pitiful 2.5% on an annualized basis below by a full percentage point

from what is considered wages in a healthy economy, one which creates positive thinking

consumers (Beckwith, 2017).

A much clearer picture emerges of a troubled economy if we put together the positive of

the steady rise in prices, the constant fall and recovery of housing starts and the large and

steadily growing gap between increase in wages and housing prices. It may be that the increase

in employment involves low-paying jobs that make the buying of as house impossible. That

means fewer housing starts. Then comes a cycle in which the rise of prices increases the housing

starts until the number of houses exceeds the number of potential buyers, which returns us to

where we started. However many positive indicators are proposed by the Federal Reserve’s

untroubled narrative, this is a picture of a troubled economy that will now be challenged by the

possibility of trade wars and a possible tax-cut which already has the label “for the rich”

attached.

It is proposed by the Trump administration as justification that corporate tax cuts would

create the jobs that were promised rank-and-file workers repeatedly while Trump was running

for office. The theory and justification behind very radical changes to the tax code is that the tax-

cuts would free money for investment which in turn would create jobs and turn the economy

around without creating a huge deficit. The housing market is foremost in the creation of

meaningful, relatively well-paid jobs, at least until the middle-class and the better paid sections

of the working class are able to afford their mortgages, which is now threatened. In fact the

housing market outside of the very wealthy depends on the appeal mortgage-interest tax

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deduction which would be halved in the proposed tax plan, potentially posing an insurmountable

barrier to many buyers and a return to the conditions during the housing recession of 2008.The

fund which tracks housing experienced immediately a steep fall as a sign of things to come

(Dougherty, 2017).

Two organizations of scholars in an interesting experiment independently applied their

economic models to project outcomes year by year setting the essential measure of economic

health, growth in the GDP, the Penn Wharton Budget Model’s and Joint Committee on

Taxation’s dynamic analysis ((PWBM & JCT, 1977).. Both came to similar conclusions, by

different routes Yes, indeed, there would be a growth, but not sufficient to cover the loss of

taxation revenue by the trillion. GDP produced by the tax cuts is not sufficient to pay for the tax

cuts, and would decrease over time. Worse, apparently following something called a dynamic

model proposed by Senators as the basis of their methodology for their tax measure, there arises

a chart of winners and losers, with the wealthy clearly getting wealthier, having for the corporate

world new deductions meaningless to the poor.

Fig. 3 Winners and Losers of the Tax Bill. Source: Center on Budget and Policy Prioritie

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Tax reform now being rushed through Congress is designed to release huge sums

devoted to mergers, acquisitions and buybacks that involves a circuit outside the mines and

factories that Trump thought to bring back through the America First nationalist program. In the

last analysis, the Federal Reserve in its monetary policy is about to make a decision that was

firmly pledged to finally raise interest rates. The position of Janet L. Yellen through to the

present was for the Federal Reserve Bank to keep raising its benchmark interest rate, employing

tortuous logic that despite the absence of visible sign of inflation, increasing competition for

workers was driving up wages so that inflation was sure to follow. She said that the Federal

Reserve had “misjudged the strength of the labor market, the degree to which longer-run

inflation expectations are consistent with our inflation objective, or even the fundamental forces

driving inflation” (Yellen, 2017).

Fig. 4 Year-on-year and month-on-month variation of seasonally-adjusted consumer price index

Source: Bureau of Labor Statistics.

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An increase in interest rates allegedly deployed by the Federal Reserve to fight an

inflation that may rise with the robust growth in employment yet to materialize ,coincides with

tax-cut that would pay for itself with savings and job creation, leaving a trillion or so for

infrastructure development, at least in theory. In fact, the easy money provided to banks and

financial institutions, and through them to corporations, had created huge profits in investment

not available in production. To withdraw the flow of money, thereby tightening credit would

potentially collapse the market, which was in fact shaken with every threat of rate increase. That

is why the simultaneous closing the Federal Reserve’s easy money programs which had

dangerously increased the US deficit and could go on no more opened up a trillion dollar flow

through tax breaks that will have to be paid for by program cuts.

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References

Ampudia, D. (2017). United States: Home price growth reaches over three-year high in

September. Focus Economics, November 28.

https://www.focus-economics.com/countries/united-states/news/housing/home...

Beckwith, R. T. (2017) President Trump Boasted of Adding 1 Million Jobs. Here Are the

Facts. Fortune. March 29.

fortune.com › Leadership › Donald Trump

Dougherty, C. (2017). Tax Change on Mortgages Could Shake Up the Housing Market, The

New York Times. Nov. 2.

www.nytimes.com 2017/11/02/business economy/tax-housing.html.

Oyadela, A. (2017). The GOP tax plan has the real-estate industry in a panic and talking about

housing recessions. Business Insider. October 3.

businessinsider.com/jobs-report-october-2017-11/?op=1

The Penn Wharton Budget Model’s and Joint Committee on Taxation (PWBM & JCT) (1977).

The Senate Tax Cuts and Jobs Act, Amended (11/15/17): Comparing Dynamic Effects

Estimated . Oct.3

budgetmodel.wharton.upenn.edu/.../the-senate-tax-cuts-and-jobs-act-amended-11151

Yellen, J. L. (2017). Inflation, uncertainty, and monetary policy. Business Economics, 52(4),

194-207.

https://www.federalreserve.gov/newsevents/speech/yellen20170926a.htm

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