Perspectives

PDF
h
3
EcoPerspectives // 4t quarter 2018  
economic-research.bnpparibas.com  
United States  
Speeding  
With the approach of US mid-term elections, the Trump administration is doing a lot to deliver economic stimulus, through historic  
corporate tax cuts, increased military spending and financial support to farmers, which are the first collateral victims of the trade war  
with China. These actions are weighing on the Federal budget deficit, which reports one of its biggest increases ever outside of a  
recession. The trajectory of public finances seems hardly sustainable, while the rapid expansion of the economy could be also at risk.  
The full employment of capacities, the peaking of corporate debt ratios and high equity market valuations are all early warning signals  
of a slowdown, that could materialize as soon as 2019.  
US business climate indexes are still perched at high levels, and for  
1
- Growth and inflation  
good reason. As lending conditions are still favourable, the Federal  
government has provided massive transfers to American companies.  
The corporate tax rate was cut from 35% to 21%, resulting in  
roughly USD 140 billion of extra savings for US firms in 2018, nearly  
a month of operating income. The repatriation of offshore profits1  
has also bolstered free cash flow: USD 464 billion was brought  
home in H1 2018, six times more than in the year-earlier period.  
GDP Growth (%)  
Inflation (%)  
Forecast  
Forecast  
2.9  
2.8  
2.5  
2
.2  
2.1  
2.1  
1.8  
1.6  
1
.3  
Asset prices and deficits both soar …  
Though smaller than the White House expected, the windfall is  
nonetheless considerable. A Federal Reserve analysis of the  
repatriation of offshore profits shows that it was essentially passed  
0.1  
15  
16  
17  
18  
19  
15  
16  
17  
18  
19  
2
Source: National accounts, BNP Paribas  
on to shareholders . In H1 2018, the amount of funds US firms  
devoted to share buybacks hit a record high, in both absolute terms  
(
USD 384 billion) or compared to assets. The impact on the stock  
2- All-time highs  
market was both exhilarating and desensitising. As US protectionist  
tendencies became increasingly clear over the past two years, the  
prospects and realisation of tax cuts sent the equity indexes  
EPS of S&P 500 companies  
PE ratios of S&P 500 companies,  
cyclically adjusted  
Trend ▪▪▪ Instantaneous  
3
160$  
34  
soaring .  
1
40$  
20$  
30  
26  
22  
Irrational exuberance? The international institutions have already  
stressed for some time the rapid expansion of leveraged positions;  
as well as and the increasing divergence between asset prices and  
economic fundamentals such as productivity and real wages (see  
1
100$  
80$  
4
for example OECD, 2017 ). Yet, at 25% a year, the instantaneous  
growth in earnings per share is far away from the long-term  
sustainable trend, which is about 5% or 6% a year, better in line with  
the nominal GDP (see chart 2). The cyclically adjusted equity  
valuation shows a very high multiple of more than 30. Moreover, as  
US Treasuries now deliver greater returns, risk premiums are  
diminishing.  
18  
60$  
14  
2004  
2011  
2018  
2004  
2011  
2018  
Source: Thomson Reuters, Shiller, BNP Paribas  
America’s economic situation, which President Trump describes as  
the best ever”, is increasingly dependent on wealth effects, not all  
of which are stock market related. House prices have regained  
about 50% from the lows of summer 2011, showing once again an  
1
The Tax Cuts and Jobs Act encourages US companies to repatriate their  
earnings held aboard, with reduced tax rates of 15.5% for liquid assets and 8%  
for non-liquid assets.  
5
important gap with median income . The rebound in oil prices has  
2
Smolyansky M., Suarez, G. Tabova, A. (2018) U.S. Corporations' Repatriation  
also helped, in a country that has nearly doubled its hydrocarbon  
production in ten years. With crude oil prices above USD 80, energy  
sector companies are at the forefront of the race for profits. Their  
earnings are expected to double in 2018.  
of Offshore Profits, FEDS Notes, September.  
3
At the time we went to press, the equity markets were entering a sharp  
correction. At 12 October 2018, the S&P 500 index was still up 29% for the two-  
year period. Source: Thomson Reuters.  
4
Organisation for Economic Cooperation and Development. In the OECD’s fall  
2
017 Economic Outlook: “financial risks are growing in the advanced economies  
5
The average price of a new house sold in July-August 2018 was USD 388,700,  
which accounts for roughly 9.3 years of the median wage, 2 years more than in  
011 and just short of the all-time high of 10 years reported in spring 2007.  
Source: BLS  
because the extended period of low interest rates has encouraged greater risk  
taking and because asset valuations continue to rise, […].  
OECD (2017), Economic Outlook, vol. 2, November.  
2
h
4
EcoPerspectives // 4t quarter 2018  
economic-research.bnpparibas.com  
Yet it is not only asset prices that are soaring but also the Federal  
budget deficit, at a pace of USD 1 billion a day, the biggest increase  
ever outside of a recession (see chart 3). Alongside the historic tax  
cuts and the ensuing drop-off in revenues, certain expenditures  
were increased, such as military spending. The budget calls for  
military expenditure to rise from USD 575 billion in fiscal year 2017  
to USD 716 billion in 2019, a 25% increase in two years. US farmers  
hit by China’s retaliatory tariffs were also allotted USD 12 billion in  
financial assistance. This might seem anecdotic, but it nonetheless  
shows that trade wars come at a cost.  
3- The Federal deficit under Donald Trump  
USD bn, over 12 months  
Corporate tax revenue(  
*)  
Federal deficit  
Military expenditure  
9
00  
600  
300  
A less euphoric future  
To date, President Trump has imposed trade tariffs on USD 300  
billion in annual imports at an average tariff of 15%. The impact of  
these tariffs have not been felt yet, because they have been diluted  
by the tax cuts, and the trade war has only just begun. However, the  
US fiscal stimulus could not last forever, whereas the trade war may  
continue or even intensify, even if the political landscape were to  
change with the mid-term elections (see box 4). In this respect, the  
United States Mexico Canada Agreement (USMCA), the tri-party  
trade agreement signed on 30 September, is unlikely to ease  
tensions since it encourages the signing members to toughen their  
*) Corporate tax  
Source: Bureau of Fiscal Services, BNP Paribas  
15 16 17 18  
(
4- US mid-term elections  
On 6 November 2018, mid-term elections will be held to renew 35 of  
the 100 seats in the US Senate and all 435 seats in the House of  
Representatives. The House could swing to the Democrats, which  
currently have 193 seats and must win a minimum of 25 seats to  
attain the majority. A large number of Republican congressmen (39)  
are not running for re-election, creating favourable conditions for a  
changeover. Statistics also support a change in power. Since the  
Second World War, the President’s party has lost 25 seats on  
average during mid-term elections, and the figure rises to 37 seats  
when the President’s approval rating is below 50% (which is the case  
for President Trump).  
6
relations with China .  
In the end, the question wouldn’t be if, but when the United States  
could feel the backlash of its fiscal and tariff polices. Faced with the  
ballooning Federal deficit, the central bank is already being less  
complaisant. The cost of borrowing in dollars is on the rise, at an  
already advanced phase of the corporate debt cycle, for both US  
and emerging market companies.  
Unlike in the US, the summer months were not as calm in the  
developing economies, which were hit by higher yield spreads,  
capital flight and plunging currencies (see the Editorial and  
Emerging countries analysis). The volume of trade has slowed down,  
but did not collapse, since some orders were undoubtedly made in  
anticipation of higher tariffs to come. Now that new barriers apply,  
there is a risk that global trade could really , and the cyclical  
uncoupling of the US will come to an end.  
In contrast, the Democrats have little chance of winning the Senate:  
they must defend 26 seats (including 10 in states that voted for  
Donald Trump), compared to only 9 seats for the Republicans. A  
possible split between the House and the Senate leaves little hope  
for a radical change in US economic policy. In particularly, the hard  
line towards trade policy is likely to be maintained. In the US,  
Congress has delegated the power to impose discretionary tariffs to  
the President. The law would have to be changed to counter this  
delegation of power, which President Trump could veto, unless  
Congress manages to attain a super majority comprising two thirds of  
the members of the House of Representatives and the Senate. An  
unlikely scenario.  
Breakdown of Congressional seats (at 30 September 2018)  
House of Representatives  
Senate  
193  
235  
47  
51  
4
35  
100  
Democrats Republicans Vacant or independent seats  
6
A clause in the USMCA requires signing members to provide 3-month  
advanced notice of any proposals for a free trade agreement with countries  
that do not have market economy status (China), a solution that gives the  
United States the option to withdraw from USMCA within six months.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
Ce site présente leurs analyses.
Le site contient 2062 articles et 568 vidéos