Tags: tax reform | house | senate | donald trump

Tax Reform Will Have Plenty of Positive Effects on the US Economy

Tax Reform Will Have Plenty of Positive Effects on the US Economy
(Dreamstime)

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Saturday, 16 December 2017 10:31 AM Current | Bio | Archive

What happened over the last hours in Washington is historical, and with now the doubts about the tax cut practically out of the way, it could be helpful for investors to keep in mind that the investment environment will be impacted and there will be, mostly, positive consequences for the U.S. economy. This doesn’t mean we will be entering a goldilocks environment.

After President Trump has used all the tact, diplomacy and political influence that he has at his disposal to support the tax bill, Republican negotiators of the House and Senate have signed off on a final version of legislation that will, at a cost of up to $1.5 trillion, deliver a steep permanent tax cut to corporations and more modest, temporary reductions for individuals and families.

Within a couple of days, the House and Senate will have final votes on the tax plan, which by the way represents the largest changes to the tax code in more than 30 years. It might be helpful to take note that the conference-committee report (1097 pages) signed yesterday won’t be subject to amendments.

There is practically no doubt that President Trump will have the “landmark” tax plan on his desk this week.

While nothing is perfect, and so is the new tax plan, it’s a fact that we will have to learn more about it over time.

Besides that, there is also a wrinkle of uncertainty in the otherwise placid outlook.

President’s Trump laudable, if unrealistic fantasy of 4 percent trend growth in the United States can be easily measured against the reality of industrial production that we got yesterday. The capacity utilization rate is also worth a quick glance and this in context of potential future inflation pressures.

The Federal Reserve indicated that industrial production rose 0.2 percent during November (3.4 percent y/y) following a 1.2 percent October rise, revised from 0.9 percent. A 0.3 percent increase had been expected.  The Fed indicated that without a rebound in oil & gas extraction activity from Hurricane Nate, total November industrial production would have been unchanged.

Capacity utilization rose to 77.1 percent from 77.0 percent, its highest level since April 2015. Factory sector utilization strengthened to 76.4 percent, its highest point since May 2008. Total factory sector capacity rose 0.7 percent y/y.

None of these numbers supports a 4 percent “trend” growth rate.

At the same time over in Europe, and with what happened yesterday in Brussels where 27 European leaders have confirmed that sufficient progress had been made in the first phase of Britain’s Brexit talks after London had given enough guarantees on the most important divorce issues that now paves the way for crucial discussions on trade in 2018 and establishing a future relationship between the EU and the UK, it is important for investors to keep an eye on the whole extremely complex situation because it’s a fact that the trade negotiations will be long, tortuous and indescribably tedious, but that shouldn’t come as a surprise to anybody.

The interesting point about these really unique trade negotiations is that they have a starting point that is precisely the reverse of most normal trade negotiations. Normally, two sides start from completely different positions and try to find common ground on tariffs and regulations. Regulatory barriers to trade being far more important, economically speaking of course, than tariffs.

The EU and the UK start from common ground and they will be trying to decide how far apart they wish to move.

So, financial markets will focus on big picture outcomes in the U.S. and the UK and try to capture the details on what’s really happening, which won’t be an easy task and will create serious risks for getting it wrong with all the negatives that this could mean for the long-term investor.

So, at least for the moment, there is a lot of positive news, which doesn’t mean that markets have become definitively risk-free.

Watch out!

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HansParisis
What happened over the last hours in Washington is historical, and with now the doubts about the tax cut practically out of the way, it could be helpful for investors to keep in mind that the investment environment will be impacted and there will be, mostly, positive...
tax reform, house, senate, donald trump
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2017-31-16
Saturday, 16 December 2017 10:31 AM
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