In the year’s first column I, like many pontificators, typically dust off the old crystal ball and this year will be no different.
By the time this publishes, the Republican tax bill will have passed. I don’t pretend to understand all the intricate nuances of the bill but suffice it to say that the wealthy and big corporations will be doing the happy dance. Also, suffice it to say that the trickle-down theory will suffer the same fate as it has in the past: It won’t work. Nonetheless, the need to overhaul business taxes was long overdue.
International markets and companies are making an increasing contribution to our economy. Although few corporations paid the marginal rate, the code favored some, penalized others, and made us less competitive worldwide. Lower corporate taxes will attract more international businesses to locate in the U.S. and simultaneously reduce the incentive for U.S. companies to locate abroad. In that regard, it will provide an economic boost.
As much as I loathe Donald Trump as president, he should be given credit for reducing the burden of federal regulations. President Obama badly overreached, imposing far too many regulations, which ultimately stifled small business growth. Undoubtedly, the pendulum will now swing too far in the other direction, it always does. But the positive economic impact related to the reduced regulatory trend should not be ignored.
At the beginning of 2017, the National Small Business Association (NSBA) conducted its annual small business survey. Granted, the survey is somewhat biased and only 1,000 companies out of 45,000 responded. Still, it provided some sense to the cost of regulations on small businesses.
Respondents estimated that small business owners spend at least $12,000 every year dealing with regulations. That may not sound like much but multiply it by hundreds of thousands of small businesses and the dollars add up fast. The federal tax code and Affordable Care Act were the most onerous burdens.
The survey also found that more than half of small businesses delayed hiring due to regulatory burdens. The other cost is time. Fourteen percent of small-business owners reported they spent more than 20 hours per month on federal regulations.
We have seen a recent uptick in quarterly GDP growth, and I believe that one of the contributing factors has been the reduction of regulations, and the anticipation that additional regulatory relief is on the horizon. GDP growth of 3 percent is a real possibility for 2018.
With respect to interest rates, the debate isn’t whether they will rise but by how much. Predictions range from two to four rate hikes. The appointment of Jerome Powell as the next Federal Reserve Chairman signals a continuation of current policy. The Fed will continue to be cautious in raising rates. I expect two rates hikes. Three hikes is a possibility if inflation accelerates but for me four is not on the table.
Speaking of inflation, there’s good news: The price of skewered chicken in Japan has increased 8 cents. You’re thinking: What kind of stupid observation is that? Blame the Wall Street Journal.
Here’s why you should care about the price of chicken in Japan. Behind the U.S. and China, Japan is the world’s third-largest economy. Mired in deflation, Japan’s growth has been anemic or non-existent for the last 15 years. But that may be about to change.
Data released at the end of 2017 indicated that core consumer prices in Japan rose 0.8 percent. The upward price pressure is being driven by higher wages resulting from labor shortages.
Some might think that deflation and the resulting lower prices are a good thing. Not really. Deflation tends to slow consumer spending because of the expectation of level or lower prices in the future. Modest inflation is stimulative, which is why the Fed targets a 2 percent inflation rate.
Price upticks in Japan have happened before only to revert back. This time feels different. If that’s the case, global economic growth may receive a boost from Japan for the first time in decades.
That leaves the financial markets. It’s shaping up to be another good year for investors. In addition to lower corporate taxes and fewer regulations, midterm election years have produced an interesting positive dynamic.
Studies have shown that on average the S&P return between Oct. 31 of the midterm year and Oct. 31 of the following year has been a robust 17.5 percent. Since 1946 there have been 17 midterm election years. Guess how many times the S&P has produced a positive return? Seventeen.
In what is unquestionably a solid pattern, investors have bought the S&P just before each midterm election and held it for a year. The lowest return was 3.2 percent in 1986 which included the Oct. 19 Black Monday stock market crash. The highest return was 33.6 percent in 1954.
The question is: Will the law of averages catch up to this midterm pattern? If the Democrats don’t continue doing stupid human tricks, and Mr. Trump continues to be its poster boy, the Republicans could suffer major midterm losses including losing control of the House.
I also wouldn’t be shocked if we had a new president by the end of 2018. And there is no telling how financial markets might react to such a unique circumstance.◼
Tony Paradiso runs a Wilton, New Hampshire-based consulting firm.