While the global landscape is rapidly changing, the US economy is still the largest in the world and remains an attractive foreign direct investment (FDI) destination.
There are many reasons why companies want to open their businesses or expand into the US. The US offers a large consumer base along with legal protections and an innovative workforce. Plus, as recently shown in our Financial Complexity Index, the USA has historically been a stable and straightforward jurisdiction for doing business.
So how is the US economy doing? Starting with a look only at the numbers shows a positive outlook. The economy grew 2.3 percent last year, representing the best growth since 2015. Unemployment rates are low at 4.1 percent and there is little inflation. The following are some of the key metrics, which we are watching, that allow us to measure the health of the economy.
- Job gain - companies in the US are hiring more and more workers, which indicates that many companies are growing and confident.
- Gross Domestic Product growth - GDP growth is an excellent measurement of economic health. Anywhere from a 2-3 percent means a healthy economy, in the developed world, and right now the US is at 2.9 percent.
- Core inflation rate - inflation is healthy and inevitable. The target rate set by the Federal Reserve is 2 percent making the current rate 1.8, below target. In response interest rates remain low currently sitting at 1.75%, although these are expected to rise if the healthy economic outlook continues. Low inflation and low interest rates reduces the opportunity cost of saving versus spending, and encourages consumers to consume.
- Durable goods orders - companies need machinery, equipment and raw materials to run their businesses but they can be very costly. If consumers and companies are buying durable goods, like cars or manufacturing machinery, it shows that they are secure in the knowledge that the economy will continue its uphill growth. Durable goods orders have increased 2.9 percent, again pointing at a consumer and corporate confidence.
The new tax reform law in the US, called The Tax Cuts and Jobs Act (TCJA), will probably boost GDP growth but in turn may make the US economy more delicate. The fiscal stimulus from this bill put money into the hands of businesses and individuals leading to more spending, which is good news for the economy but can ultimately cause financial imbalances. Only time will tell how successful the policies will be and what impact they will have on the national debt.
We are seeing the following elements of the tax bill already creating stirs in the market:
1. cut in the corporate tax rate from 35% to 21% - while some businesses will benefit greatly from these lower taxes, others may find the cost of capital to become higher
2. move to a territorial system of taxation – which, along with the lowering of the corporate tax rate, is resulting in many firms repositioning their businesses and restructuring their operations
3. lower "toll charge" or transition tax of 8-15% - encouraging businesses to repatriate historic/deferred earnings and take advantage of this one-off, lower corporate rate
4. limit on interest deductibility of 30% of 12-month earnings ¬– impacting the way that firms finance domestic mergers and acquisitions, potentially driving US firms towards foreign M&A
The full impact of the tax reform bill is yet to be seen but so far the economy seems to be responding positively. Certainly, the Capital Markets are feeling bullish at the prospect of more liquidity as money is repatriated back to the USA.
High performing sectors
Many sectors are continuing to perform strongly, such as oil production, technology, housing, machinery and construction. This signals a strong economic outlook.
Increased extraction of oil in the US is lessening the reliance on imports. Since OPEC mostly controls global prices and US production, this will help buffer the economy to global changes.
Technology sector industry trends driving growth are cloud computing, flexible consumption, cognitive computing, user-friendly tools, APIs, apps and data. These innovations are in high demand causing tech companies to pursue agile methodologies to bring them to market fast.
Housing represents one-sixth of the GDP, making it a good indicator of the health of the economy. With new homes being built and others being bought and sold, it shows that people are feeling that now is the right time for such a large investment.
Machinery and Construction
An increase in building and the need for machinery has skyrocketed construction spending. Machinery producers provide technology for other manufacturing and service industries. Also as construction projects continue to increase, more workers are needed, thus boosting the economy.
Trade Wars and Tariffs
A potential trade war is brewing between the US and China which ultimately could affect many industries across multiple jurisdictions. As of now, President Trump is imposing tariffs on imports from China, as well as other nations, and China is hitting back with their own tariffs on US exports.
It is important to remember that no one "wins" in a trade war, when nations retaliate against each by announcing more and more tariffs on products. These tariffs will cause prices of imported goods to climb and are designed as a way of increasing the competitiveness of US businesses and creating domestic jobs. However, the impacts will depend on how quickly US based companies can react to increased demand, with the likely short-term impact being a favourable position for importers located in countries which are excluded from these tariffs.
The list of industries that will be affected by the tariffs are automotive, spirits and alcohol, steel, food staples like pork, canned goods packaging and many more.
Generally, tariffs distort the "free hand" of the economy and cause changes in the flow of money to sources of value. If a trade war does escalate, it is likely to signal a time of increased complexity of doing business in and with the USA, making it even more important for impacted businesses to choose the right partner to advise on the implementation of their strategy.
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