October 2, 2017

What a way to end the summer. Three hurricanes – Harvey, Irma and Maria – came in quick succession and devastated a wide swath of the Texas Gulf Coast, much of Florida from the Keys to Jacksonville, numerous islands in the Caribbean and, perhaps worst of all, Puerto Rico. The fifty-plus inches of rain in Houston put about a third of that city under water at the height of the storm.  The subsequent flattening of the Keys and near-complete collapse of the electric grid on Puerto Rico will make for a very long recovery in all of these locales. It also guarantees a steady and significant flow of FEMA money to these hard-hit areas.

Yet even as the US southeast suffered some of the worst hurricane damage in many years, the economy continues to hum along and the stock market keeps breaking new records. There are probably a number of reasons why the economy continues to perform so well. High on that list is Congress’s push to implement tax reform.

You might think that, after three tries and as many failures to repeal Obamacare, the markets might be a little leery of the current attempt to reform the tax system. But one look at the Dow Jones suggests otherwise. The markets seem to believe that, past failures notwithstanding, the Republican majorities in the House and Senate and a Republican Chief Executive are all that’s needed to get some sort of tax reform across the finish line. It also doesn’t hurt that the primary investors in the markets – notably the billionaire class – like the tax reform proposal a lot.

And why shouldn’t they? While these reforms are being touted as mainly benefiting the middle class, the statistics tell a different story. The Atlantic magazine reports that a study by the non-partisan Tax Policy Center finds that that taxpayers in the top 1% of households by income will reap approximately 50% of the tax reform benefits. Whether it is the reduction in the top tax bracket from 39.5% to 35%, the elimination of the alternative minimum tax, or a dramatically lower tax on corporations, the wealthiest Americans will benefit the most. For the half of all taxpayers at the lowest end of the income scale, the proposed tax reform will net them just 10% of the total tax savings.

But there are still some big hurdles that must be cleared before tax reform becomes reality. It’s much easier to cut taxes than it is to pay for them. The current tax reform plan knows exactly where it would like to see taxes cut. But it is vague about how where it will find the money needed to keep these tax cuts from exploding the national debt.

Of course, there is the well-worn promise that tax cuts will lead to faster economic growth and higher overall tax revenues – maybe this time it’ll even work out that way? Then there is the general promise that the plan will eliminate lots of special-interest loop-holes and deductions. But which ones? Every loop-hole seems to have its own lobbying group, and you can bet they are all gearing up to fight any effort to cut their loop-hole. Already, the ingenious Republican plan to eliminate the deduction of state and local taxes (generally highest in the Blue states like California and New York) is running into major pushback from the many Republican Representatives who live in the more conservative districts of those states.

We can expect a lot more of this before the proposed tax reform plan ever passes, if indeed it ever does. In the wake of the Obamacare failures and the dubious record of Congressional achievements thus far in 2017, perhaps the markets are being, oh, I don’t know… irrationally exuberant? We will know soon enough. Meanwhile, it sure does feel good to see the Dow zoom ever higher – above 22,500 as I write this article. How much longer can it last? My prediction – at least as long as the tax reform plan seems like it might actually pass. 

September 4, 2017

 

The long Labor Day weekend is always just a little bittersweet. As much as we love the extra day off, we know it also marks the end of summer, the return of cooler weather and, for many of us, a renewed focus on making those end-of-year numbers before the holidays hit.

 

This year, like the last several, we can get back into work mode without worrying too much about the state of the economy. According to the Bureau of Labor Statistics (BLS), the economy has not seen a net decline in the number of jobs since September 2010. That makes the 156,000 net new jobs in August the 83rd consecutive month of job gains, one month shy of seven years! 

 

But, about those 156,000 jobs... expectations were higher with predictions at about 200,000. The BLS also revised job numbers downward for June and July by 41,000, reflecting an economy that is expanding, but at a sluggish pace. Finally, unemployment ticked up to 4.4% from 4.3%. Not a big change, and nothing that anyone seems to think is worth losing sleep over. But it is not the robust growth than many have been hoping for, and that the stock markets still seem to believe is coming. Despite the mildly disappointing news, the equities markets continue to perform well with the Dow Jones just under 22,000 as I write this market review.  

 

Perhaps the biggest surprise of the latest round of economic news is the surprising weakness is wage growth. This is especially puzzling, given that the unemployment rate has been at or below 5% since September 2015. Generally, when unemployment falls to “full employment” levels (somewhere in the 5% range), pressure on wages increases. But that does not seem to be happening, at least not right now. The good news is that this may cause the Federal Reserve to hold off on further increases in interest rates. But the bad news is that, for a lot of Americans, wages are still barely keeping up with expenses.  

 

One big concern not reflected in any of these numbers is the impact of Hurricane Harvey which devastated Houston and other parts of the Texas and Louisiana Gulf Coast at the end of August. Houston alone accounts for approximately 3% of the US economy, and the state of Texas accounts for almost 10%. The flooding in the region was widespread, impacting residences and businesses alike. Even worse, there is at least a possibility that these horrors could be compounded by Hurricane Irma which is now a Category 4, and could potentially blow into the Gulf of Mexico later this week.

 

Putting aside the possibility of a second hurricane, the recovery from Hurricane Harvey is likely to take many months and cost tens of billions of dollars. Although fewer people died in Harvey than Katrina, the devastation could be more impactful on the national scene for the simple reason that Houston is a much larger and more economically important city than New Orleans.

 

We won’t know for another month what impact Hurricane Harvey had on the national economy, but it is hard to imagine that it will not be felt, at least in the short term. The statistics are staggering. One million cars unusable; 40,000 homes destroyed and many more damaged; oil refineries shut down. Just east of Houston, the entire city of Beaumont is still without running water. For tens of thousands of Texans, getting back to work will be difficult if not impossible. Even those with dry houses and working cars may find that their employers are shut down or inaccessible. For those whose cars were destroyed by the floods, just getting to work in car-dependent Houston will be a major challenge. 

 

Kind of makes crying over the end of summer seem a bit silly. There are worse problems in the world – just ask anyone who lived through Harvey.