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Economy's in a 'Sticky' Situation

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Nov. 23, 2016 Economy's in a 'Sticky' Situation We may have a new president, but we have the same political structure we’ve had for 240 years. Don’t expect any radical changes any time soon, said economist Chris Kuehl of Armada Corporate Intelligence, who addressed members of the Association of Steel Distributors last week in Las Vegas. ASD held its fall conference in conjunction with Fabtech 2016, which attracted more than 31,000 to peruse the latest in metal forming and fabricating technology. “We have a pretty sticky system,” Kuehl said. “It’s relatively difficult for any one person or any one party to make changes very fast.” Kuehl expects five factors to dominate the nation’s economic and political agenda in 2017: • Interest rates—The Fed is poised to raise rates next month, and may well hike rates an additional point or two by the end of next year, depending on how well the economy fares. • Inflation—Inflation remains well below the Fed’s target core rate of 2 percent, but wages are trending up, which should lead to higher prices next year. “We are not going to see rampant inflation, but it should be enough for the Fed to be a bit more confident about raising rates,” Kuehl said. • The strong dollar—The U.S. dollar could strengthen even further as it attracts investors from all over the world. Most other countries will strive to keep the value of their currencies low, which gives their exports a cost advantage. Interestingly, China’s currency has strengthened in relation to the dollar as its wages have risen and it seeks to nurture a more consumer-driven economy, and one less dependent on exports. • Government gridlock—Even on initiatives both parties support, such as infrastructure investment, the path to success is unclear. There is no unanimity on how to pay for it. Given the high national debt, it’s unrealistic to borrow enough money for a trillion-dollar infrastructure bill or to cut a trillion in spending to pay for it. The new administration is hoping to entice the private sector to invest, perhaps with tax breaks on funds repatriated from overseas. But private investors will expect returns, which could mean more toll roads and bridges and higher fees at airports and seaports. • Tax reform—The U.S. has one of the highest corporate tax rates in the world, but reaching a consensus on how to reform the tax code to encourage business investment and stimulate the economy is no easy task. Large corporations have armies of accountants that bend the current tax laws to their advantage. Half the U.S. population pays little or no taxes because their incomes are too low. It’s those in the middle, including small to midsized businesses like service centers, that foot the bill. “For a tax break to stimulate the economy, you have to give it to the people who spend money,” Kuehl noted. “But giving a tax break to wealthy people while we are in the grips of such right-wing and left-wing populism will be politically unpopular.” Kuehl predicts the U.S. economy will finish 2017 in better shape than it is right now, with Republicans in control of Congress and the White House, but the debate along the way could be just as acrimonious. “There are a lot of Republicans that don’t like Trump. The Republican party is more like four or five different parties masked as one.”