January 2018

Monetary policy is determined by the central bank (e.g. the Fed) while fiscal policy, like taxes and spending, is determined by legislation (e.g. Congress and the President). “Fiscal Stimulus” is legislation that lowers tax rates and/or increases spending to boost economic growth. The new federal tax law falls into this category.

The new tax law has enormous ramifications. These include lowering US corporate tax rates to globally competitive levels, applying a foreign profits repatriation tax, and lowering personal tax rates. For individuals, some of the tax deductions and lower rates may be temporary.

Several large corporations announced “sharing” of some tax savings with their employees via bonuses and raises. In a tightening labor market, raises and bonuses are needed to retain good employees. Corporations are finding it increasingly hard to replace skilled labor as the economy grows, baby boomers retire and younger workers leave for higher paying jobs.

Full employment has resulted in a tight labor force which can now ask for raises. Annual wage growth is currently 2.5% and rising.

Lower tax rates could result in $1,000 of additional spending power for many with incomes under $70,000. A great deal of the domestic wage growth, lower income taxes, and lower payroll tax withholding (starting in February) should increase consumer spending. Since consumer spending accounts for 70% of the US economy, overall economic growth should accelerate.

Repatriation of foreign profits could result in $2 trillion of cash returning to the US. Repatriated funds could be used for a combination of capital expenditures, research and development, debt payments, dividends and share repurchases. No matter how it is used, the money moves into the hands of another, and then they decide how they want to spend or invest their funds. This results in the money moving again. In economic terms, this activity is the velocity of money. As this velocity grows, economic activity and inflation can accelerate.

The release of government and insurance funds to rebuild Florida, Houston and Puerto Rico, combined with potentially higher defense and infrastructure spending could result in faster economic growth and a shortage of supplies and skilled labor.

Meanwhile, the vast majority of the world is currently experiencing economic growth. Increased global growth should further enhance US economic activity through increased exports, more profitable foreign subsidiaries, and global demand for US services and technologies. As such, corporate America may have a banner year in 2018.