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Markets and Economy

Midyear Review: 3 Forces Driving the Economy in 2018

Halfway through the year, Commercial Banking Head Economist Jim Glassman discusses three forces impacting the economy right now: corporate tax relief, global growth and the stock market.
JIM GLASSMAN, HEAD ECONOMIST, COMMERCIAL BANKING
June 27, 2018

Halfway through the year, the economy is experiencing a strong expansion. Average US household wealth has expanded to record levels, GDP growth is expected to speed up to 3 to 4 percent over the next few years, and the headline unemployment rate is at a five-decade low.

In the past, when the economy reached full employment, an economic downturn shortly followed—so it’s natural to be concerned over whether the US is headed for a recession. Yet strong fundamentals are fueling growth in the US and abroad, inflation is tame and the financial imbalances that contributed to economic downturns in recent business cycles are notably absent. The three main forces driving the economy are:

1. Corporate Tax Relief

Since the Tax Cuts and Jobs Act of 2017 slashed the headline corporate tax rate from 35 percent to 21 percent, businesses have seen significant savings—with total windfalls expected to exceed $100 billion this year. This could boost after-tax corporate profits by approximately 10 percent.

Research suggests that corporate taxes are ultimately borne by workers—more than customers, shareholders or creditors—meaning a reduction in the corporate tax rate should eventually lead to companies spending more money on wages. Although worker pay hasn’t risen as much as expected yet, wages should eventually rise in tandem with a tightening labor market. Businesses will be pushed to invest in talent and productivity-enhancing technology to remain competitive and retain employees. Overall, savings from the tax cuts are boosting capital expenditure and M&A activity, which should continue to help lift GDP through the next few years.

2. Global Growth

Living standards are rising steadily in emerging economies across the world, creating new demand for both US and globally manufactured goods. Particularly in Asia—where half the world’s population lives and works—a rise in living standards means more workers are entering the middle class, which in turn is driving an increased consumption of high-end US exports, such as mobile software and entertainment.

And developed international economies, such as Europe and Japan, are experiencing ongoing optimism alongside continued recovery. Although Europe’s first-quarter growth metrics were lower than expected, metrics don’t tell the whole story.

3. Stock Market

Since last year, the US equity market created $7 trillion in wealth. Although the stock market has since been sluggish—and even lost $2 trillion due to concerns over tariffs—it’s still up significantly over last year. Average household wealth is rising, as evidenced by an increase in consumer spending—most households are in a stronger financial position than they’ve been in decades, and are more comfortable spending more of their paycheck.

Although tariff threats continue to escalate between the US and China, pressure from the broader business community should keep global trade open as the stock market continues to climb.

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