The U.S. Economy & the ‘Game-Changer’ Agenda
Nelson unearths the economic rewards and risks in Trump’s priorities
David Nelson’s annual presentation at the NACS State of the Industry Summit usually dissects key economic indicators for the c-store industry. This year, that key economic indicator was President Donald Trump.
While campaigning, Trump promised to “drain the swamp” in Washington, D.C. Whether that comes to fruition depends on his priorities, said Nelson, professor of economics at Western Washington University. Will he succeed, or “will he discover Washington, D.C., is a protected wetland?”
“A new president is potentially a game changer,” said Nelson, who is also founder and CEO of Finance & Resource Management Consultants Inc., dba Study Groups, Bellingham, Wash. He took to the stage with a red “Make America Great Again” baseball cap and a truckload of “Trumpisms,” channeling the president’s hyperbole.
But Nelson brought his subject, “Trump, Trade and the Economy,” back down to reality with this message: “America is becoming great again.” With Trump’s victory, the Dow Jones Industrial Average saw its fastest-ever 2,000-point gain. Republicans’ economic confidence soared, as did that of mostly Republican-leaning small-business owners.
Going into the election, many Americans felt that the economic and political system in the country was “stacked against people like them,” Nelson said. “The election gave new hope to at least a group of voters that previously felt that they weren’t part of the economy and nobody was really looking out for their interests.”
These Americans’ expectations are still high, he said, even as the political reality of what Trump might and might not be able to accomplish begins to sink in. And despite these sentiments, Trump’s disapproval rating is very high, with 48% disapproving of his performance as of February, well below the rating of any other president in the past 50 years this early in his administration.
But just how much of a game changer Trump will be is not clear.
The Trump Agenda
While trying to map out the new administration’s policies can be an elusive task, Nelson offered six items that appear to be on the president’s agenda:
- Defense of borders
- Immigration reform
- Building infrastructure
- Fair trade
- Tax cuts
For the business community and traditional Republicans, deregulation and tax cuts would be of the highest priority.
“Americans over time have become increasingly convinced that there’s too much government regulation,” Nelson said. “People can see the connection between government regulation and an inability to get things done, and an increased cost that has to be borne by people [who] are providing goods and services that we can consume.”
During the first days of his administration, Trump signed an executive order that for every new regulation proposed, two regulations needed to be cut. Nelson believes that was a good thing. “Regulations get implemented and then we forget about them, but they’re still on the books maybe years after they’ve taken effect,” he said.
There are approximately 1.1 million federal regulatory restrictions (instances of “shall,” “must,” “may not,” “required” and “prohibited”), up from about 400,000 in 1970. The number has been growing by about 15,000 a year.
“Think about your own business,” Nelson said. “What regulations hurt your business the most?” While retailers have likely adapted to some older regulations, they are still figuring out how to respond to newer regulations such as menu labeling.
“Streamlining the process could make a difference in how well we could run our businesses, as well as how fast the economy could grow,” he said.
He cited one study that suggests regulations adopted since 1980 have slowed the United States’ rate of growth by eight-tenths of 1% per year.
That other business-friendly priority—tax cuts—has its own opportunity as well as complications. The United States has the highest corporate income tax in the developed world at 35%, higher than even France. Trump has proposed cutting the corporate tax rate from 35% to 15%, and the top individual rate from 39.6% to 33%. e expects these cuts to accelerate economic growth and believes that the economy would grow 3.5% over the next 10 years.
The Congressional Budget Office (CBO) and most economists, however, do not think this growth rate is realistic, Nelson said. The CBO, for example, is forecasting a 2% growth rate. Meanwhile, Trump predicts the steep tax cuts will stir a burst of hiring. He anticipates a growth in jobs of 25 million, compared to the CBO’s 7 million.
“Who is right about that?” Nelson said. “The jury is still out.”
While Trump’s talk of lower taxes is popular with businesses, the president does not specify what would make up for the lost revenue. From Nelson’s point of view, there is one possible option to slow a swelling budget deficit.
“If we reduce the reliance on income tax, we’ve got to think about other taxes,” said Nelson. A controversial idea that Trump favors is a border adjustment tax. It would be a 20% on imports, “harmonizing” U.S. taxes with foreign taxes.
He also suggested a value-added tax, national sales tax, carbon tax or other consumption taxes as possibilities to make up the difference. A carbon tax, for example, “is a broad-based tax and would be a lot better way to raise revenue and deal with a problem … than a patchwork of regulations,” he said.
Boom and Burden
Unemployment is slowly falling. The unemployment rate, after peaking at 10.1% in 2009 at the height of the Great Recession, is now 4.7%.
Job growth has been “phenomenal,” Nelson said. “We need about 50,000 to 100,000 a month just to keep up with the growth in the population and labor force. Over the last three months, we have averaged over 200,000 jobs added per month.”
Of those 209,000 jobs, 58,000 were in construction, 37,000 were in professional and business services, 28,000 were in manufacturing and 8,000 were in mining.
“These people are great customers in your industry,” he said. “This is a very bullish sign for the convenience-store industry.”
Average hourly earnings are up 2.8% over the last 12 months through February. Projections are for wage growth rates to increase for the next three years because of rising inflation as well as a tighter labor market.
And wage growth for lower-income workers, the bottom 20%, is surpassing that of the top 80%.
Even though there has not been an increase in the federal minimum wage, some states have raised their own minimum wage. The average gain for states has been about 65 cents an hour.
“People are shopping your stores because they have more real income to spend on the goods and services that you’re selling,” Nelson said.
How much are these increases in state minimum wages boosting the pay of lower-income workers? “On a national basis, hourly wages are 6 to 10 cents an hour higher for lower-income workers than they would have been without these state increases,” he said.
With the bottom 20% of the labor force shrinking, c-store retailers that may have depended on it for workers “are probably going to have to pay more because there are fewer of those people around,” Nelson said. What strategies are retailers implementing “to attract and retain a high-quality labor force”?
Rising Risk of Trade War Trump is a proponent of fair trade. He has withdrawn from the Trans-Pacific Partnership (TPP) and has vowed to renegotiate the North American Free Trade Agreement (NAFTA) because he believes they do not offer fair terms for the United States.
He has promised to bring back jobs lost to China, Mexico and other places. However, a study by Michael Hicks, professor of economics, and Srikant Devaraj, senior research associate, both of Ball State University, Muncie, Ind., estimates that 88% of the jobs lost in U.S. manufacturing from 2000 through 2010 were the result of technological change and productivity, not of trade or shifts in demand. And the economy has become much more integrated on a global basis, Nelson said.
“If you evaluate the uncertainty and the risk of the Trump presidency, a trade war is probably the biggest risk,” Nelson said, adding that trade improves not only global income but also U.S. income.
Under a full trade war, the United States would be pushed into recession in the next two years and the unemployment rate would raise to 8%, according to the Peterson Institute.
Meanwhile, countries open to trade have grown faster over time. A report by Jeffrey Sachs and Andrew Warner, professors of economics at Harvard University, Cambridge, Mass., found that developed nations open to trade grew at an average annual rate of 2.3% over a 20-year period, while those closed to trade grew at only 0.7%.
“My hope is that we’re not going to throw the baby out with the bath water and do the stupid thing as it relates to trade, which has generally been a positive for the U.S. economy,” Nelson said.
A Bridge to Nowhere?
In terms of U.S. infrastructure—roads, bridges, structures, equipment and more—the average age of government assets is up “quite substantially,” Nelson said.
Meanwhile, government gross investment as a percent of gross domestic product (GDP) has fallen “dramatically” over time. “We are simply investing less over time as a share of our GDP,” Nelson said. “We’re not even replacing the stuff that’s wearing out.”
In an address to Congress, the president said he will ask for legislation that will invest $1 trillion to replace the nation’s “crumbling infrastructure” and replace it with “new roads, bridges, tunnels, airports and railways.”
“We have paid for and are now eight years into this economic recovery, and there’s not a lot of slack left in the economy,” Nelson said. “Is this the time to embark on a massive public infrastructure project, or is it a little bit late in the business cycle?”
As Trump’s intentions continue to unfold, the next big question is whether he will execute on them.
“Will Trump be able to deliver on more infrastructure spending, less regulation and tax cuts?” Nelson said. That’s a “big unknown.”
What Immigration Means to C-Stores
About 41 million U.S. residents were not born here. Of these, about half are naturalized U.S. citizens. An estimated 12 million are living in the country illegally.
While President Donald Trump has made deporting illegal immigrants a priority for his administration, it is important to remember the many benefits of immigration to the economy and the country, said David Nelson, professor of economics at Western Washington University and founder and CEO of Finance & Resource Management Consultants Inc., dba Study Groups.
“Our country is richer and stronger because of immigration,” Nelson said. “A measured flow of immigration can help our demographics, it can help our rate of economic growth, and I think it’s good for [the c-store] industry in terms of an enhanced customer base and enhanced employment pools.”
Immigration can also keep the working-age U.S. population from falling, Nelson said.
“If we were to close our doors to immigrants, we would find that over the next 20 years, our working-age population would go from 173 million down to 166 million,” he said.
With immigration, that number would actually rise to 183 million.
Yet the president’s plan to build a wall on the U.S. border with Mexico as a way to deal with illegal immigration could have benefits for the c-store industry.
The U.S.-Mexico border is 1,989 miles long, with 1,000 miles that would require a wall. Estimates put that cost, including labor, at $15 billion to $25 billion. Trump’s proposed cost is $10 billion to $12 billion.
“If this comes about, it is a substantial construction project for this part of the country, and the construction of this is going to be a real boon to suppliers and workers actually building the wall,” said Nelson. “We know that construction workers are among the best customers in the convenience-store industry.”