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Analysts: Tax bill may overheat economy
Experts fear what will happen after short-term boost
WASHINGTON — For President Donald Trump and Republican lawmakers, economic prospects may never look better than today.
The economy is poised for what most analysts expect to be the best performance in years — a rare moment of synchronized global growth that has been lifting U.S. manufacturing and demand at home.
Mere anticipation of the Republican tax plan, which won final approval Wednesday, has given a “Trump bump” to stock prices and business confidence.
“If we can’t sell this to the American people, we ought to go into another line of work,” Senate Majority Leader Mitch McConnell, R-Ky., told reporters early Wednesday after the tax bill passed his chamber.
Now, with the tax bill’s passage, the positive economic news comes wrapped around a kernel of worry: It could turn out to be too much of a good thing, economic analysts warn.
The worry is not about the details of the tax package, controversial and uncertain as they are. Rather, it is the robustness of the American economy.
No expansion lasts forever. The current surge is 8½ years old. By spring, it will be the second longest expansion in U.S. history.
With the tax cuts, U.S. growth may get an extra short-term boost, accelerating to as much as 3 percent across the year in 2018, a figure not reached in a dozen years.
But extra fiscal stimulus, coming at a time when the economy already is perking, could quickly lead to overheating, the analysts say.
“Simply stated, we are adding substantial stimulus to an economy already operating near full capacity,“Northern Trust economists Carl Tannenbaum and Ryan Boyle said in a research note shortly before the Senate approved the tax bill 51-48.
Mark Zandi, chief economist at Moody’s Analytics, issued a similar caution: The poor timing of these tax cuts, which are financed largely by increasing the federal deficit, “washes out most of the benefits,” he said.
As labor markets tighten, many employers will increasingly struggle to find workers, putting upward pressure on wages. That, in turn, could lead to faster inflation, higher interest rates and a tightening of the business cycle — pushing the country toward a recession.
Most of what makes the current economy so strong is a matter of inheritance. Aside from recoveries in Europe, Japan and even Russia and Brazil, the U.S. is benefiting from the result of decisions made years ago about how to get the country out of the 2008 financial crash — the worst economic crisis since the Great Depression.
Most experts say that quick government action in late 2008 and early 2009 staved off immediate disaster and saved major industries and tens of thousands of jobs. Creative but careful monetary policy in the following years led to a slow but steady recovery.
The results of those efforts would have been inherited by any president, Republican or Democrat.
The question now is, what next?
Many experts, including Federal Reserve policymakers, have recently marked up their growth forecast for next year by about a half percentage point, but the Fed and some private economists do not see the Republican tax plan buoying the economy beyond the short term.
The bill could give many workers bigger take home pay as early as February with adjustments in their tax withholding. The biggest benefits, however, will be reaped by wealthier Americans, and unlike the tax bill’s corporate cuts, the changes to the individual tax code are temporary.
Barring any major shocks to the economy — such as rapidly higher interest rates or a trade war with China — most experts predict U.S. growth will perform above potential next year.
It’s what happens after that which has some economists worried.