The combination of tax reform, expectations of regulatory relief and healthy household balance sheets is likely to extend the current U.S. economic expansion through 2019, setting a new postwar record, says Ellen Zentner — chief U.S. economist for Morgan Stanley — in the latest episode of the ABA Banking Journal Podcast. ABA’s Economic Advisory Committee, which Zentner chairs, recently projected that consumer savings and business investment due to the tax bill will provide 40 basis points of lift to growth in 2018, which combined with strong economic performance in the second half of 2017 is fueling a continued expansion.
“If we look back at President Trump’s first year in office, it’s been on regulation that he’s been most effective and can continue to be effective,” Zentner says, noting that much of the run-up in equity values can be attributed to expectations of further regulatory easing. “It’s an extremely difficult thing to quantify,” she adds. “Economists have a sense that regulatory [easing] is having a positive, uplifting effect on the economy.”
Meanwhile, she expects tax reform to provide an unexpected boost to credit quality during a mature stage of the cycle. “Healthy balance sheet dynamics, which are already in existence, are going to be met with a renewed lift to disposable from higher paychecks,” she says on the podcast. “It’s a very unusual situation to be in late in a cycle that you’re getting a renewed lift and resurgence in credit quality. . . . Credit is an engine of growth in the economy.”
Zentner sees higher risks to the upside, noting that if the economy grows faster than expected and inflation begins to rise above the Fed’s threshold, the Federal Reserve might sense a need to raise rates more quickly. She is encouraged by Jerome Powell being named Fed chairman, calling him “the best choice if you were going to replace Janet Yellen.” After his five and a half years on the Fed board, “we know his reaction function,” Zentner says. She expects to see three rate increases on a gradual pace in 2018, as well as a continued focus on “smart regulation” on the supervision side of the Fed’s responsibilities.
If you can’t see the audio player above, click here to listen to this week’s episode.