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Washington Ices Fiscal Cake and Wall Street Reassesses: Eco Pulse

It’s a year of stimulus, and the near-term growth impact could be significant

As the dust settles following a flurry of fiscal action in Washington – from tax cuts to the recent congressional budget negotiations – Wall Street’s economists are taking a step back to assess the end result. 

We run down their updated projections in this week’s economic research roundup. We also take a look at studies on how job market concentration is weighing on your paycheck, at the downfalls of nepotism, and at a milestone moment in advanced-economy employment. 

Check this column each Tuesday for the latest in economic writing from around the world. 

That easy feeling 

Various Wall Street research notes 
Published Feb. 11-12
Available to research subscribers


President Donald Trump released a draft budget on Monday calling for higher spending on the military and a Mexican border wall and cuts to entitlements. While presidential budgets are generally dead-on-arrival – they lack the support in Congress to stand a chance – there’s no shortage of real fiscal news coming out of Washington. Republicans and Democrats have agreed to a budget deal that eases spending caps. That anticipated discretionary spending boost comes on top of a deficit-expanding tax rewrite that took effect last month, and the measures have set the stage for serious fiscal expansion this year. 

So what’s the economic fallout? Economists across Wall Street are rolling out upward revisions to their growth forecasts, with most of them calling for 0.3 to 0.4 percentage point higher growth this year from the spending cap relaxation – Natixis, Nomura, JPMorgan and Credit Suisse have all released estimates in that ballpark.  The anticipated boost could matter for the Fed. As higher government spending pushes GDP gains to 3.1 percent in 2018 and 2.4 percent in 2019, America’s central bank may increase interest rates four times, Credit Suisse economists led by James Sweeney said in a note. That’s up from the three 2018 rate increases the team had previously expected. 

As Wall Street warms to the four-rate-hike theory, it’s setting the stage for an exceptionally interesting March 20-21 Fed meeting. It was always going to be a fun one – it’ll be Jerome Powell’s debut as chairman and the central bank is expected to make its first rate increase of 2018. But now Fed watchers will also be curious to see whether policy makers project four rate increases this year, or whether they’ll stand by the three they forecast in December. Let the fiscal-monetary showdown begin. 

Labor market, from concentrate

Superstar Firms, Super Profits, and Shrinking Wage Shares
Published February 2018
Available to Goldman Sachs subscribers

Wallet feeling light? Rising concentration in the labor market has left companies with more power, pushing down the share of income held by normal employees and depressing annual wage growth by a quarter percentage point per year since the early 2000s, based on a Goldman Sachs analysis of industry- and city-level data. “Ongoing falls in the labor share—for instance driven by the persistent momentum of superstar firms—may hold down trend wage growth further,” Daan Struyven writes.  If the post-1998 average fall in the labor share persists, it could lower the rate of wage growth at full employment to 2.6 percent from 3 percent to 3.25 percent in the past. 

Struyven’s piece is timely. Just this week, Brown University economists including Gauti Eggertsson released a working paper on how monopoly profits are changing economic and financial relationships, while a separate paper found that on-the-job training improves productivity, but firms reap most of the profits. 

All in the family 

Family first? Nepotism and corporate investment
Published January 2018
Available on the Bank for International Settlements  
website

No matter how much you love your nephew, you probably shouldn't hire him, if Bank for International Settlements research has it right. 

Companies that practice nepotism suffer the consequences, according to this paper. They’re saddled with lower-quality employees and less incentive to exert effort, and they suffer from underinvestment as a result – they simply pass on good investment opportunities. This is a big deal, because nepotism is common. In the researchers’ U.S. database, 35 percent of companies disclose family ties, more than double the percentage of family firms among U.S. public firms. 

Weekly Demo(graphic): Hangover, cured. 

OECD Unemployment Rate in December 2017 Falls Below its Pre-Crisis Level
Published Feb. 12, 2018
Available at the OECD website 

Since the global financial crisis, unemployment has remained elevated in the Organisation for Economic Cooperation and Development’s member nations, which include advanced economies like the U.S. and U.K. As of December, the group has finally turned the page. 

 

(For more economic analysis, see Benchmark)
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