Tax Cuts Likely to Lead to Records for Recovery

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2017 tax reform bill and the budgetSometimes it’s hard to believe that this expansion is already more than 8 years long–only 18 months short of the record 120-month expansion that occurred from March 1991 to March 2001.

A few analysts are concerned about a recession occurring over the next year or two. From our view, the tax cuts and reform just passed by Congress and signed into law by President Trump increases the probability that this expansion will enter the record books.

Real gross domestic product (GDP), the broadest indicator of economic activity, is expected to expand by 2.3 percent in 2017 according to our forecasts after growing just 1.5 percent in the prior year.

Next year is stacking up to produce the fastest growth of this recovery as we see it. We expect real GDP to advance 3.0 percent in 2018 and 3.3 percent in 2019.

Most economists have increased their outlook for growth over the next two years, in large part, due to the tax cuts and reform, but the expectations vary based on their assumptions about how businesses and consumers will react to the tax cuts.

We expect the reduction in the corporate tax rate will enable businesses to invest more in computers and equipment which will enhance productivity. This will initially increase employment for businesses making these goods. It will also eventually lead to wage gains for workers who are now more productive.

The increased wages, employment, and individual tax cuts will all lead to more consumer spending. With consumer spending making up about two-thirds of GDP, consumers are an important factor in economic growth.

The state and Richmond metro area will also benefit from the faster national growth. When the final employment numbers are in, we expect Virginia employment to increase 1.4 percent in 2017 and 1.5 percent in 2018. That compares to 1.5 percent and 1.2 percent in the nation—the slower growth in 2018 is largely due to slower labor force growth.

We expect the Richmond metro area to continue to grow slightly faster than the state and nation. Employment is expected to grow 1.6 percent in 2017 with health care adding almost 3,000 jobs. Also adding over 2,000 jobs is a sector called administrative and support and waste management and remediation services. The growth in this sector is mainly driven by firms that provide temporary help services and professional employer organizations.

Looking ahead to 2018, we expect employment in the Richmond metro area to advance by 1.7 percent with health care continuing to provide the largest number of new jobs.

(This article first ran in the Richmond Times Dispatch on January 1, 2018)

Chmura
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About Christine Chmura

Christine Chmura is president and chief economist at Chmura Economics & Analytics. She can be reached at (804) 649-3640 or at chris@chmuraecon.com.
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