Key indicators show a robust economy in 2017

Simon Constable


Great news – the U.S. economy should speed up next year.

If all goes according to plan, that will mean better raises for those with jobs, and more opportunities for those looking for work. There are a couple of potential bumps in the road, but so far they don't point to an imminent problem.

Trump tax cuts. "The tax cuts that [President-elect Donald] Trump is proposing should be stimulative for the economy," says Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors in New York. The reduced tax burden should help the economy grow faster.

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Furthermore, when the new president is sworn into office he should be able to get new tax regulations passed into law. "He has both houses of Congress under control," Chintawongvanich says.

Trump's plan, as we understand it so far, isn't just focused on one area of the tax code, but rather would be across the board for both individuals and corporations.

Tax cuts at the individual level put more money in the pockets of workers, who then tend to spend at least some portion of that additional money. In turn, that spending leads to more economic activity. The money not spent gets saved and should be recycled into investment by businesses.

For corporations, lower taxes should mean more investment, at least that is the theory. If it plays out as expected, then the economy should see money plowed into new factories or business ventures. If enough companies invest then expect wages to rise as the already-solid labor market gets tighter.

Export boom. "We see good exports even with the stronger dollar," says Lakshman Achuthan, co-founder of the New York-based Economic Cycle Research Institute. "That's a little counterintuitive, but it is a positive for growth early next year."

He says it's because of "a global industrial sector upturn," of which there is already some evidence.

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The Chicago Purchasing Managers index jumped from 50.6 in October to 57.6 in November. Any reading above 50 indicates an expansion in the region's manufacturing sector. Better still, the new orders component jumped 10.7 points to 63.2 in November. New orders are particularly important when considering the future of the economy because they represent economic activity which has not yet happened.

Although the Chicago PMI is a regional survey, it is important because manufacturing is interlinked across the globe. Unlike the Las Vegas quip that what happens in Vegas stays in Vegas, what happens in China doesn't stay in China. The supply chains for all major manufacturers are connected across many countries.

As Achuthan says, when one part of the industrial world does better, then all tend to see a benefit.

Infrastructure. Infrastructure spending should give a short-term boost, says Michael Arone, chief investment strategist for State Street Global Advisor's SPDR exchange-traded fund business.

Not only will companies hire people to help renovate the country's ailing roads, tunnels and bridges, but profits will be made as materials get purchased and used in construction.

One of the potential problems with any government-run infrastructure program is whether the projects result in infamous "bridges to nowhere," or on the other hand whether they actually help the economy long term. That remains to be seen, although the history of such projects isn't always pretty.

Trade headwinds. One big headwind that was much in the news during the election campaign was the potential for protectionist trade policies. Specifically, the specter of increased tariffs on goods coming into the country was raised numerous times by then-candidate Trump. Such a move, if it actually happens, would be bad for economic growth.

"For the last 25 years we've had a continuous move to free trade," Arone says. "Next year a lot of that will become harder, more difficult."

He does note that it is too early to predict what will happen on trade, and that the new administration will likely focus on what are seen as easier goals such as the tax cuts and infrastructure spending.

The Fed. "We're expecting U.S. interest rates to rise," says Bill Adams, senior international economist at PNC Financial Services Group in Pittsburgh.

Rising borrowing costs tend to have two major impacts on the economy. In the first place, higher rates attract capital from outside the U.S. pushing the value of the dollar higher. That makes U.S. goods and services more expensive to foreign buyers.

The second, and no less important factor, is that rising interest rates make borrowing more expensive. That can crimp consumer demand for goods and services as well as for real estate. For corporations, higher borrowing costs can cut into profits, and potentially reduce capital expenditures – neither are good for economic growth.

However, the tax cuts proposed by the Trump team may more than offset this issue, as the increased after-tax income more than covers rising borrowing costs.

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It's also true that the devil will be in the details when it comes to the Federal Reserve, with the focus on the strength of the economy relative to the speed of increases in the cost of borrowing. If the Fed hikes rates too fast, then it could slow growth.

Copyright 2016 U.S. News & World Report