Connecting the Dots: Uncertain New Year

Appeared in Ladue News on 1/25/2018

Industrialist J. Paul Getty, once identified as the richest living American, has been quoted as saying, “Without the element of uncertainty, the bringing off of even the greatest business triumph would be dull, routine and ultimately unsatisfying.”

If Getty still lived today, facing the uncertainty we expect in the financial markets in the coming months, I imagine he’d feel quite satisfied.

Fueling unpredictability in 2018, of course, are the recent passage of the federal 2017 tax cuts. Those cuts – the most sweeping update of the U.S. tax code in more than 30 years – clearly constitutes a fiscal stimulus. Its sponsors predict it will stimulate investment, encourage companies to bring back overseas funds and create thousands of new jobs. However, if that fails – instead, corporations may initially opt to use their tax savings only to buy back shares and increase dividends – then the legislation could add massive amounts to the federal debt, which might necessitate cutbacks in federal programs and lead to negative economic impact.

Businesses appear to be the big winners in the area of such cuts, with their rates dropping from 35 to 21 percent and the corporate alternative minimum tax having ben repealed. The budgetary cost of the cuts, amounting to almost 1 percent of gross domestic product, will be felt between now and 2022. There’s a lot at stake – and there’s also a lot of hope that this will work as envisioned.

Individuals may also benefit, at first, from the new tax brackets, which have been lowered to 10, 12, 22, 24, 32, 35 and 37 percent. The new arrangement also doubles the child tax credit to $2,000 and gives a $500 credit for nonminor child dependents.

But uncertainty exists here, too, as the law caps state and local tax deductions, and it essentially repeals the individual mandate of the Patient Protection and Affordable Care Act of 2010, colloquially known as Obamacare.

Questions abound. Will individuals spend their tax savings, further stimulating the economy? Will more taxpayers take the standard deduction rather than itemizing, which could impact charitable donations to the nonprofit sector? Will legislators ever find common ground on a comprehensive health care strategy that gives all of us certainty and affordability?

Adding to the uncertainty are short-term rate increases expected from the Federal Reserve. Since 2009, U.S. markets have been helped by a massive Fed intervention; interest rates have been pushed down to record lows, while asset purchases have depressed bond yields. The Fed has indicated it may raise rates three times in 2018, after three increases in 2017. Even if the Fed moves slowly, higher interest rates often lead to an end to credit cycles, as indebted companies and consumers default in greater numbers.

One other situation to watch in 2018 involves the increased scrutiny over privacy and control of our personal data. The FANG tech stocks – Facebook, Amazon, Netflix and Google (now Alphabet) – will continue to face growing pressures and restrictions such as those found in a new privacy law in Europe, the General Data Protection Regulation. The changing dynamics of net neutrality also pose uncertainty for consumers worldwide.

In sum, the U.S. economy has been undergoing what amounts to a sugar rush during the past several years. Economic history suggests that will end soon. Whether or not the tax cuts, Fed actions and other factors yet unknown will sustain the good times ranks as the defining uncertainty of 2018. Still, as author Stephen Covey tells us, “If there’s one thing that’s certain in business, it’s uncertainty.”

Benjamin Akande

Dr. Benjamin Ola. Akande is the president of BOA Consulting and former president of Westminster College in Fulton, Missouri. He has a Ph.D. in economics and previously served as dean of the George Herbert Walker School of Business & Technology at Webster University.