Economist outlines 2018 expectations, federal tax cut impact

Economist Mervin Jebaraj sees “moderate” growth for the U.S. economy in 2018 despite tax cuts that are purported to jump-start a stimulus for higher-than-usual growth.

Jebaraj, who heads the UA Walton College Center for Business & Economic Research, said that the new federal tax cuts will be positive for the economy in the new year.

“Looking forward to 2018, most economists think that the economy will grow somewhere around 2.5% to 2.6%. That takes into account the big stimulus that we just referred to passed at the end of last year in the form of individual and corporate tax cuts. Including all of that, we’re thinking 2.5% to 2.6%, which is just slightly above the 2.3% 2017 growth rate that we had this year,” he said. “So, again, moderate but rather tepid growth rate, not the higher than 3% growth rate that we would like to see in this country, that we need to see in this country to both pay for the tax cuts and to pay for our obligations in the future.”

Jebaraj also said that while the tax cuts – a subject of immense political debate – will stimulate the economy, there is a propensity to put too much emphasis on their positive or negative influence.

“I think we can safely say that wages and bonuses are rather unrelated to tax changes in the upcoming fiscal year, right? We’re looking at year-end bonuses and wage increases,” he said. “Let’s take Walmart, for example. They announced that they’re raising their lowest paid wage to about $11.00. That really reflects two things, A, that the economy is as strong as it is, that the unemployment rate is as low as it is. To hold on to their workers they’re going to have to pay them more to keep them from going to the competition. Target, for example, is already offering $11.00. Target had also promised to go to $15.00 by 2020. All Walmart is doing by offering $11.00 is trying to compete to keep the best workers at Walmart and not let them go to their competition.

“Same thing with the bonuses. Bonuses are given because the company did well in any given year. You see that for a variety of different companies that made those announcements at the end of the year. The difference is that they linked it to the tax cuts, which I guess is more PR than anything else. In 2016, 25% of all workers got a bonus. You didn’t see a lot of announcements linking it to just about anything at that point. We also saw wage increases in 2015 and 2016, and they weren’t linked to anything either. These are all part of the economy doing as well as it has.”

Jebaraj noted that the United States is in its 105th month of economic expansion and that wage growth is likely to be a visible sign of continued expansion. He says another area to watch for corporate health is in business investment spending.

“I mentioned that investment spending was up in the last quarter of 2017. There will probably be some increase in investment spending, although it will probably be more in the out years than in 2018. I think companies make investment decisions for only one reason, if they think that the economy is strong enough to justify an investment increase. The corporate tax rate being cut to as low as it is now, from 35% to 21%, means that in the out years, a few years down the line, we will see more increases in investment spending. But currently, the announcements that we’ve seen from companies like Apple, etc., are essentially just counting up the investments that they already planned to make, given the strength of the economy,” he said.

“If there are any changes in investment spending from this tax cut, we’ll likely only see them down the line. Currently, companies haven’t changed their investment spending a whole lot. In fact, if they had money offshore, they’d do just as well to borrow against it, and spend money here domestically, if they think that they can make more money investing it than earning interest off of it. Again, from that perspective, we’ll have to wait and see what the investment spending brings from the tax cuts, but right now we don’t see a whole lot of it,” Jebaraj added.

You can watch his full interview below.