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Snaith: Re-election Fears Will Drive Tax Reform Passage

The tax reform fuse is lit, but if it isn’t signed into law before the end of the year, University of Central Florida economist Sean Snaith says, more than a few in the Republican-held Congress could be looking for work after the midterm elections.

“Reelection is the motivation that I maintain will eventually lead to the passage of tax reform,” said the director for the Institute for Economic Competitiveness at the UCF College of Business in his final quarterly U.S economic forecast of 2017.

The House has passed a version of the bill, which is in the Senate with an administration goal of signing it into law by Christmas. The House bill proposes reducing the number of tax brackets, lowering rates for households while increasing standard deductions and child tax credits, and lowering the corporate tax rate while eliminating some tax breaks.

Snaith said to expect the Federal Reserve to initiate another 25-basis point hike in December. The Fed previously raised rates in June. The forecast notes stronger economic growth and higher inflation from Trump administration policies will continue a faster pace of hikes over the next three years, with the federal funds rate hitting 3.5 percent by the end of the first quarter of 2021.

Real Gross Domestic Product (GDP) growth, which slowed to 1.5 percent in 2016, is forecasted to hit 2.3 percent in 2017 and 3.5 percent in 2018 before slipping to 3.2 percent in 2019 and 2.6 percent in 2020, as the Federal Reserve tightens interest rates and shrinks its balance sheet.

Average monthly payroll growth has decelerated the past three years and was further slowed by the aftereffects of Hurricane Irma, according to the forecast. Uncertainty and regulatory burden have been hindering payroll job growth, which slowed to 1.8 percent in 2016. The forecast shows payroll job growth slowing to 1.5 percent in 2017 before stabilizing at 1.6 percent for 2018-2020.

“Tax reform will boost job growth,” Snaith said, “but this late in a recovery, the effects will be short-lived.”

The unemployment rate is expected to decline to 3.8 percent in early 2019, and job growth will be enough to keep up with labor force growth through the end of the forecast horizon. Underemployment stands at 7.9 percent as of October 2017, but it also is forecasted to decline through 2021. The spread between unemployment and underemployment rates is down to 3.8 percentage points, the lowest since December 2007 when the Great Recession began.

The forecast states the foreign sector will continue to be a drag on U.S. growth. The recent weakening of the dollar will boost exports and depress imports, but faster GDP growth and higher interest rates will send the dollar higher again. As a result, net exports will continue to fall through 2021, and uncertainty over trade deals are expected to continue to cast a shadow over this sector.

The housing market, which continues to recover, is expected to slowly improve through 2020, even with rising interest rates. Housing starts are forecasted to rise from 1.2 million in 2017 to 1.71 million in 2021.

Snaith is a national expert in economics, forecasting, market sizing and economic analysis who authors quarterly reports about the state of the economy. Bloomberg News has named Snaith as one of the country’s most accurate forecasters for his predictions about the Federal Reserve’s benchmark interest rate, the Federal Funds rate.

The Institute for Economic Competitiveness strives to provide complete, accurate and timely national, state and regional forecasts and economic analyses.