Trump Tax Tease

President Trump’s “new” tax plan looked an awful lot like his old one from the campaign, though with far fewer details. The one-page overview was more like an incomplete set of bullet points, than a blueprint. For example, the plan would reduce the number of tax brackets from seven to three - 10, 25 and 35 percent, but there was no breakdown of income levels to which the new rates would apply. It also intends to provide a break for child and dependent care expenses, but did not specify the dollar amount.

Treasury Secretary Steven Mnuchin said that although the proposal would reduce total tax dollars paid into the system (by trillions of dollars over the next decade, according to most analysts), it would spark sustained 3 percent economic growth, a full percentage point higher than growth seen over the past few years. That additional growth would offset the lost revenue, according to Administration officials, an assumption that even most conservative economists don’t think can work.

The plan as outlined would provide disproportionate benefits to the wealthy and would blow a hole in the budget, creating doubts that anything significant will actually get passed. The Wall Street reaction to the plan was muted, as investors wait for Congress to hammer out the details for what is now more widely being seen as a temporary tax reduction rather than comprehensive, long-term tax reform. The sausage-making process may not result in a law that can be passed before the end of the year, which means that its potential economic impact might not felt until 2018.

Speaking of economic growth, once again first quarter results were disappointing. The economy expanded by just 0.7 percent, the slowest in three years. Analysts at Capital Economics note “there is a well-established pattern of GDP growth in the first quarter and then rallying over the remaining three quarters…Since 2011, the average for first-quarter growth is only 0.9 percent, compared with 2.4 percent in each of the other three quarters.”

This time, the slowdown was attributed to a slump in consumer spending, which was held down by a drop in motor vehicle sales from a near-record high at the end of last year and the unseasonably warm winter weather, which depressed utilities spending. That said, for all of the high levels of consumer confidence permeating recent surveys, economist Joel Naroff notes “they didn’t go out and put their money where their mouths were.”

The tepid Q1 reading is unlikely to deter the Fed from remaining on target to raise interest rates this year. Although there is no action expected at this week’s policy meeting, the statement should keep open the prospect of a hike in June, especially given that private sector wage gains are accelerating.

The April employment report should show a pick up from the weak, weather-related March reading of just 98,000 jobs to 185,000. The unemployment rate is expected to edge up to from the post-recession low of 4.5 percent to 4.6 percent. One area of focus will be retail employment, which increased by 17,000 per month in 2016, but has fallen by an average of 8,000 per month in 2017.

While the industry is undoubtedly undergoing a seismic shift, the trend appears to be accelerating this year. Capital Economics notes: “14 retailers have already filed for bankruptcy this year, almost equaling the 2016 total, and three of the biggest department store chains – Macy’s, JC Penney and Sears – will close more than 400 stores between them. Department store employment has fallen by close to 90,000 over the last five months alone.”