4th Quarter 2018
by Joe A. Hollingsworth, Jr.
As readers of the Market Watch articles know since September 2016, I have been a persistent optimist about what should happen to the manufacturing and distribution industrial space sector. I have covered: 1) the accelerating GDP; 2) the ever-increasing on-shoring of jobs; 3) the improving protective tariffs and equalizing trade; 4) relentless regulation relief; 5) low inflation and inflation not driving interest rates; 6) more jobs available and more people working than ever in America’s history; 7) reasonable energy costs; 8) more consistent business friendly courts, etc., etc.
With the knowledge that the longest expansion in America’s history would take us to September 2019, I am constantly asked what carries this expansion beyond that. While there are numerous answers and possibilities (some political and some not), I think it comes down to two broad points.
With a stroke of a pen and at the appropriate time when the economy needs a boost, President Trump can simply inflationadjust the capital gains tax rate. The courts have approved that the government can change regulations to reflect the inflation indexing of capital gains. However, the President has the power to do such on his own by executive order to demand treasury issue a “definitional order”. This could be a powerful motivator that can be well-timed and used as a tool to continue to prime the economy. This should be a significant decrease in the capital gains tax, thus prompting more velocity of real estate turns and more key investing which would literally free up billions of dollars for further investment. We have no crystal ball but, I think the 2nd quarter of 2020 would be a politically-potent and economically-viable time to unleash this mighty tiger, if not sooner.
In my opinion, it is not enough to just have 4% growth in the GDP; but, it also has to be coupled with productivity gains. There are so many new workers coming into the workforce that there is a time lag in the learning curve necessary for them to operate in an efficient manner. Within the next 6 months, we will start seeing productivity gains from all the newer employees becoming “seasoned”. Seasoned employees will be using new and more efficient equipment bought under the new tax reform act (allowing 100% write off) producing a productivity miracle. While major expenditures are taking place for capital investment, these will all be productivity based and designed to be operated by less employees; thus, stretching our existing employee base further. This combination of 4% GDP growth and tax inspired capital expenditures will finally restore our natural historic productivity back to the American worker and our economy. This by itself can extend the expansion an additional 3 to 4 years.
Barring any catastrophic political or global economic issues, we continue to stand by last quarter’s comments, “Build Baby Build”! These economic times will be part of the history we will be so proud of in a few years that is leading to the restoration of the American Dream and the fact that our kids will be better off than us. We are not only in for the longest economic expansion in American history but, we project it will go on several years longer than economist project. Now is not the time to dream small dreams!