U.S. Overview: Will the Economic Tailwind Continue?

Panel Composition and Context

• Moderated by Ross Duvall (Chief Research Officer, Milken Institute) on a U.S. economic overview titled "Will the economic tailwinds continue?"
• Panelists include: John Chen (BlackBerry), Francisco Gonzalez Diaz (Banco MEX), Vasant Prabhu (Visa), Stephen Ratner (Willett Advisors), and Alan Schwartz (Guggenheim Partners).

Current Economic Data and Trends

• Disconnect observed between surging business/consumer confidence and softer hard data indicators like retail sales and capital goods orders.
• Consumer spending remains robust, with credit card growth in high single to low double digits and debit card growth in mid-single digits through Q1 2017.
• Spending base is broadening: Middle-income households are growing faster than affluent ones, and growth is shifting from top-tier metros to mid-tier and smaller cities.
• Housing market recovery remains unremarkable; millennial home buying is delayed by median age trends (29–33) and affordability issues in high-cost markets like California.
• Corporate capital investment remains weak ("animal spirits" absent) despite record profits, driven by mature business models, low demand growth, and the lack of a small business investment engine over the last decade.
• Productivity growth remains meager, limiting potential GDP growth to approximately 2% due to a shrinking working-age population and slow hours worked growth.

Trade Policy and NAFTA

• NAFTA Integration: Panelists argue NAFTA is highly beneficial, noting the "North American made" footprint is global; 40% of Mexican exports to the U.S. originate as U.S. content, and the average auto part crosses the border 6–8 times (12 times with Canada).
• Economic Interdependence: Data indicates a 10% decrease in Mexican exports boosts U.S. GDP by 0.1%, while a 10% increase in Mexican income similarly boosts U.S. GDP by 0.1%.
• Negotiation Strategy: Francisco Gonzalez Diaz advocates for renegotiation to maintain the trade platform, emphasizing technology, transparency, and talent development over "sharp" policy changes.
• John Chen's View: Warns that focusing on specific industries like lumber or dairy is "short-sighted"; negotiations should prioritize intellectual property (IP) and services to foster innovation rather than protecting specific farming jobs.
• China Comparison: Francisco Gonzalez Diaz distinguishes China as a protectionist, rule-violating economy, whereas Mexico has strictly adhered to NAFTA rules.
• China Relations: Panelists view the initial Trump-Xi engagement as a positive reset, with China remaining "mute" on aggressive rhetoric and focusing on economic dialogue.

Jobs and Manufacturing

• Manufacturing Reality: Stephen Ratner argues bringing manufacturing jobs back is "King Canute" behavior; Mexico and China offer comparable productivity at significantly lower wage costs ($7–$10/hr vs. $55/hr for U.S. unionized workers).
• Wage Disparity: The core economic discontent stems from workers moving from high-paying manufacturing jobs ($20–$28/hr) to lower-paying service roles ($12–$15/hr), despite a low unemployment rate (4.5%) and 15–16 million jobs created since the crisis.
• Skills Gap: Vasant Prabhu notes over 5 million unfilled job openings, indicating a critical skills mismatch rather than a lack of jobs.
• Innovation Focus: Recommendations include shifting U.S. focus from traditional manufacturing to high-tech sectors (healthcare, software, autonomous vehicles) and improving education to close talent gaps.

Tax Reform and Corporate Policy

• Consensus on Reform: Universal agreement that the current corporate tax system is "broken," creating distorted incentives and placing the U.S. at a competitive disadvantage against the UK, France, and Ireland.
• Legislative Outlook: Stephen Ratner estimates a 50/50 or lower chance of passing comprehensive tax legislation in 2017 due to intense partisan polarization.
• Repatriation: Stephen Ratner and John Chen express skepticism about using a repatriation tax holiday to fund infrastructure, noting that corporations hold sufficient cash domestically (e.g., Apple's $25 billion in the U.S.).
• Pass-Throughs: Alan Schwartz highlights the complexity of matching tax rates for C-corps and pass-throughs (LLCs), noting the latest proposals attempt to decouple these rates to facilitate a deal.
• Investment Behavior: John Chen suggests corporate boardrooms prioritize shareholder returns (buybacks) to avoid disappointing markets when facing the high cost of breaking old business models for new growth.

Legislative Outlook: Affordable Care Act (ACA)

• Status: The repeal and replace effort stalled in the House, exposing deep fractures within the Republican caucus (Freedom Caucus vs. moderates).
• Strategic Impact: Panelists debate whether delaying ACA repeal in favor of tax reform is a strategic error or a necessary pivot to establish legislative credibility.
• Prediction: Alan Schwartz predicts an "ACA modification" fitting reconciliation rules rather than a full overhaul; Stephen Ratner estimates the odds of passage in 2017 are "good bit less than 50%."

Forward-Looking Statements and Predictions

• Infrastructure: Panelists agree infrastructure investment is critical for productivity; the U.S. has dropped from a top-5 global infrastructure rank to 25th–26th.
• 2017 Legislation Forecast:
  • Tax Reform: High probability of a corporate tax bill passing, potentially via reconciliation (55% chance per Alan Schwartz).
  • ACA: Low probability of full repeal; likely limited modifications.
  • NAFTA: Negotiations will launch and likely conclude by the end of 2017 or early 2018, though no major deal is expected "past" the start of negotiations immediately.
• Market Reaction: Alan Schwartz posits that the post-election market rally was 70% driven by global fundamentals (post-Brexit, post-election clarity) rather than 30% policy expectations, though deregulation remains a key positive driver.