GSU Economist Predicts 2018 Tax Cut Gain for Middle Class

ATLANTA-After a tax cut for the middle class by the end of 2017, expect gross domestic product (GDP) growth above 2.0 percent in 2018 and 2019, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.

“While President Trump pursues trade skirmishes, the economy will experience pain in the second half of 2017,” Dhawan wrote in his “Forecast of the Nation,” released Thursday, May 18, 2017. “Part of the damage will be an increase to the sub-4.0 percent mortgage rates the housing market has become accustomed to, because of lower demand for treasuries by Asian nations as they sell less to us due to temporary tariffs and other trade measures.”

These trade skirmishes will be felt in the manufacturing and transportation sectors attributable to lower exports from the strengthening dollar and affect job creation in the short run.

“A good middle class tax cut, followed by a minor corporate tax cut, will be enough to mollify the financial markets after the trade skirmish induced pain,” Dhawan predicted.

Due to this pain, the president will be able to negotiate his tax deal. If not, Dhawan expects Congress to suffer in November of 2018.

“Following these tax reforms, economic growth will be above the 2.0 percent mark consistently in 2018 and 2019. Consumption will soar above 3.0 percent in each quarter of 2018 as these personal income tax cuts will be spent,” said Dhawan.

Dhawan also envisions increased business investment aiding job growth. But to get to 2018, the economy will go through some pain during 2017.

As a result of increased long bond yields, which are a side effect of Trump’s trade measures, the Federal Reserve will be able to stand pat following their June rate hike. Dhawan believes rate hikes will resume in early 2018, after trade skirmishes die down.

“The first quarter of 2017 indicates a disconnect between the soft indicators and the hard economic data,” he said.

Business and consumer confidence have shown sharp increases since the election, but first quarter GDP grew an anemic 0.7 percent. The number was dragged down by an inventory correction, warm weather that led to less spending on utilities and a drop in vehicle sales.

“The good news is the weather is hotter than usual now, inventories will get replenished soon and future reductions in vehicle sales will be gradual.”

Dhawan pointed out the economy has yet to see the “Trump bump” the stock market and a business friendly administration would predict.

“The harsh reality is retail sales were lackluster in February and March, and business investment indicators have not shown momentum,” Dhawan said. “Investment is a risky proposition, and no CEO or board wants to be caught spending based on promises. The daily drama in Washington does not help.”

Highlights from the Economic Forecasting Center’s National Report

  • Following GDP growth of 0.7 percent in the first quarter of 2017, growth in the second quarter will rebound, but will be subpar in the last half of 2017 due to trade skirmishes. Overall, the economy will expand at 1.9 percent in 2017, 2.2 percent in 2018 and 2.6 percent in 2019.
  • Business investment growth will be 4.6 percent in 2017 and 4.2 percent in 2018, then rise to 4.8 percent in 2019. Jobs will grow by a monthly rate of 141,000 in both 2017 and 2018, and a better 157,000 in 2019.
  • Housing starts will average 1.206 million units in 2017, rise to 1.211 in 2018 and 1.266 in 2019. Auto sales will be 16.6 million units in 2017, 16.3 in 2018 and 16.2 in 2019.
  • The 10-year bond rate will rise to 3.0 percent in 2017, 3.6 percent in 2018 and 4.3 percent in 2019.