Recession or No Recession? Watch the Consumer

In the 90’s the catchphrase was, “It’s the economy stupid.”  Today wise investors will adopt the catchphrase, “It’s the consumer stupid”.   Why?

The U.S. economy is currently a single engine economy driven by consumer spending.  And much like flying, it is generally better to be supported by two engines instead of one. 

Because of this, the number one economic variable I am watching today is consumer confidence.  Why confidence?  Because consumer confidence will drive future consumer spending, currently the sole private engine of economic growth determining whether we avoid or fall into a recession.

Outside of government spending, consumers were the sole engine of economic growth in the third quarter.  Absent government spending, third quarter GDP growth was a meager 1.55%.  That is why all eyes are on the consumer today:  As the consumer goes, so too will go U.S. economic growth. 

  • Business investment, which includes investment in structures, equipment, intellectual property and investment in inventory, again detracted from economic growth contracting in the third quarter. 
    • Trade also reduced economic growth in the third quarter.
    • Conversely, the heroic consumer continued spending contributing mightily to third quarter GDP growth. 

What does the future hold for consumer spending and a result the U.S. economy?  It’s all about consumer spending capacity and confidence.

Consumer Capacity and Confidence

Consumer spending is a function of two components:  Capacity and confidence. 

Capacity

The consumer’s capacity to spend looks healthy as employment growth is adequate, consumers are saving more today than in the past, and both consumer debt levels and debt payments are currently manageable.

Employment:

Lowest unemployment rate since 1969

Continuing, albeit moderating employment growth

Continuing, albeit moderating wage growth

Savings Rate

The personal savings rate was at 8.1% as of August.  This is well above the 4.6% average during the prior economic expansion indicating consumers have the capacity to spend more by saving less.

Balance Sheet:

Consumer debt as a percentage of GDP was 76% as of the end of 2018, much more favorable than the 99% level reached during the peak of the last economic cycle.

Household debt service payments (the interest consumers pay on their loans) as a percentage of disposable personal income are more than 13% below the long-term average thanks to today’s low interest rates.

Confidence

While financial capacity is a necessity for consumer spending, it alone won’t cause consumers to spend.  Consumers must also be confident.  Consumer confidence is what converts financial capacity into actual spending.  How is the consumer feeling today?  Looking at the levels, consumers are feeling good.  Looking at the trend, cracks are forming.

There are two primary measures of consumer sentiment, one produced by The Conference Board and one produced by the University of Michigan, both are surveys of how consumers are feeling.   The most important questions in understanding the likelihood of consumers’ willingness to convert their financial capacity into future spending are those relating to consumer expectations

The most recent survey of consumer confidence from The Conference Board showed consumer confidence remained elevated, but less so as consumer confidence declined in October.   Consumer confidence has declined three straight months and is now down more than 7% from its July high.  Importantly, consumer expectations declined at a greater pace having fallen more than 15% from its July high.   I am watching this closely to see both if a. consumer expectations decline and b. if the rate of decline increases. 

The most recent survey of consumer sentiment from the University of Michigan showed consumer sentiment continuing its rebound.  After peaking in May, sentiment fell by more than 10% through August but has since improved in September and October.  Expectations have also rebounded after falling nearly 15% in August from its May high.

Like the survey of consumer confidence by The Conference Board, I am watching this closely to see both if a. consumer expectations decline and b. if the rate of decline increases. 

Consumers Put on Watch

To understand the likely path of consumer sentiment, watch the headlines. Consumers are highly sensitive to headlines.  Having limited time to dig into the details, consumers often take cues from headlines.  Today, as financial market, job market, and trade war headlines go, so too will consumer confidence, spending, and the economy.

Financial Market Headlines

There is a concept in economics called the Wealth Effect.  The wealth effect is the concept that changes in household wealth impact consumer spending.  The idea is that when consumers are feeling wealthier, whether it be through rising 401k’s or home values, they are inclined to spend more.  Conversely, declining stock market values or home prices can make consumers cautious leading to restrained spending.  With home values relatively stable, if you want to know whether consumers will keep spending – watch equity market volatility because that will impact consumer sentiment and their willingness to convert their spending capacity into purchases.

Employment Market Headlines

Even if equity markets continue climbing higher, if headlines surrounding the employment market turn negative or even just less sanguine, consumer sentiment will also take a hit.  If headlines become less optimistic including highlighting slowing job growth, or especially if they indicate rising unemployment rates, consumer confidence will take a meaningful hit, a hit which will be translated into reduced spending.  Concerned consumers are not carefree consumers. 

Trade Headlines

Anytime “war” is in a headline that is not good for consumer confidence.  We’ve now had talk of trade war in the headlines for well over a year. Tariffs have been cited as a concern among consumers in the University of Michigan’s sentiment surveys.  While it is possible that the equivalent of a trade truce may be entered into with China, it will leave the most important issues unresolved creating the potential for ongoing flare ups in the trade conflict.  Additionally, the U.S. is engaged in a trade war with Europe.  And that’s just today.  We may be in another trade conflict tomorrow.

All Eyes On the Consumer

While there are hundreds economic variables to track, with consumer spending currently the sole non-government engine of economic expansion, the mood of the consumer is the number one variable to look to for insights into whether the U.S. will enter into or avoid a recession.  As the mindset of consumers goes, so too will the economy.  In the 90’s the catchphrase was, “It’s the economy stupid.”  Today wise investors will adopt the catchphrase, “It’s the consumer stupid”.  

Why China May Not Want A Meaningful Trade Deal Before the 2020 Election

Is it safe to assume that China wants a meaningful trade deal with President Trump?  If not, that has very real economic ramifications and consequences for investing strategies.

Up to this point, discussions of the U.S. – China trade war often assumed the only question was when a trade deal would get done and under what terms.  The underlying assumption was that President Trump could get a trade deal if he wanted it, that it was just a matter of under what terms.  But is that the case?  It is possible China may not want a meaningful trade deal with President Trump before the 2020 election.  If so, why not?

President Trump tweeted the following as an argument for why China should make a trade deal before the 2020 election, “And then, think what happens to China when I win. Deal would get MUCH TOUGHER!”  While he may have thought he was making an argument for China to make a deal sooner rather than later, he instead may have reduced his chances of getting a trade deal, at least of any consequence before the election.

Imagine you are the president of China and you see that Tweet.  President Trump just told you he is going to be “much tougher” if he gets reelected and doesn’t have to run for reelection.  China’s leadership would logically then ask, “If this is what he is like to deal with when he is facing a reelection, what would he be like to deal with if he didn’t have to consider reelection?”   If they did ask that question, that would likely lead them to do everything they could to lessen his reelection odds.  One powerful way China could hinder his reelection odds – not make a meaningful trade deal before the election instead maintaining pressure on U.S. economic growth leading up to the election.    An ongoing trade war would further slow near-term U.S. economic growth, including in key battleground states, making President Trump’s reelection efforts that much more difficult.  The prospect of dealing with President Trump after the 2020 election could be leading China to prefer trying their luck with one of the Democratic presidential contenders instead of President Trump.    

If China’s leaders have decided they would prefer to negotiate with one of the Democratic contenders, it would make more strategic sense for China to delay a trade deal or at best, agree to a symbolic deal that does little to help the U.S. economy. China could be trying to run out the clock on President Trump hoping for a new negotiating partner after the 2020 election, and there are some indications this is occurring.

One thing we know is that President Trump isn’t getting much from China today.  If you doubt this consider the following:  Would President Trump being piling on tariffs, blacklisting Chinese companies, and threatening to remove Chinese companies from U.S. stock exchanges if China was making concessions and trying to get a deal done?  President Trump’s actions indicate China isn’t giving him what he wants, and progress isn’t being made.  You don’t implement punitive measures in the middle of negotiations when both sides are moving toward an agreement.  China is already doing little to make a meaningful deal, instead offering short-term “goodies” in the hope it will appease President Trump and put off additional tariffs. 

Some argue a trade deal will get done sooner rather than later because China needs a trade deal more than the U.S. This argument is based on the premise that the trade war is hurting China economically more than the U.S.  Even if that is the case, it overlooks a key fact:  President Xi Jinping made himself president for life, he is not facing a reelection.  Additionally, unlike in the U.S., China’s government has absolute control over economic policies, fiscal spending and its central bank.  President Xi can implement fiscal and monetary stimulus much more easily than President Trump bolstering the Chinese economy. 

Even if at some point President Trump proclaims he made a deal with China, it will be largely symbolic. China has little incentive to do anything to support the American economy before the 2020 election and President Trump is losing leverage each day the 2020 election gets closer. While it is not too much of a stretech to predict at best a “photo-op trade agreement”, the provocative question is whether China want to apply pressure to the American economy more than a meaningful deal leading up to the 2020 election.

What Does the September Jobs Report Tell Us About the Economy?

While there is ongoing debate whether we are heading toward a recession, what is indisputable is that job and economic growth continues to slow.  This sometimes gets overlooked as predicting recessions can be more interesting than looking at today’s facts. 

Fact 1: 

Monthly job growth has slowed significantly from 2018.

September added 136,000 jobs, well below the 223,000 average of jobs added per month in 2018.  September’s weak number is not an anomaly.  157,000 jobs were added on average during the last three months, a substantial decline from the three-month average of 245,000 as of January 2019.

   Source:  Bureau of Labor Statistics

While this is partially due to challenges in finding qualified employees, there are signs in the most recent job report that businesses are also likely scaling back hiring in response to slowing economic growth in what may be becoming a self-fulfilling cycle of slower growth.  Add in slowing economic growth globally and near record stock valuations become increasingly difficult to justify.

Fact 2:

While the unemployment rate is at a 50-year low, wage growth fell to less than 3% on a year-over-year basis, down from a high of 3.4% in February. 

This is a problem because if job growth is slowing, wage growth needs to accelerate if consumer spending is going to increase further.

Additionally, moderating wage growth indicates that the labor market is not as tight as the unemployment rate suggests meaning the pullback in hiring is not due entirely to difficulty in finding workers.

What the September Jobs Report Means for Investors

Weakening job growth provides further support for focusing more on capital preservation than capital accumulation. 

While the next recession may be the subject of talk around the watercooler and at cocktail parties, you don’t have to know when the next recession will occur.  What you do need to know is that economic growth is already weakening.  Why?  Because slowing economic growth will place downward pressure on corporate profits, a key ingredient in stock valuations.  It can also create a negative feedback loop in which slowing economic growth leads companies to pullback on investing (which they already have) and eventually hiring leading to further slowing of economic growth and the cycle continues downward.

At some point, stock market investors will no longer be able to ignore slowing economic growth and corporate profits.  When that happens, stock prices will fall and unlike periods over the last couple years when stock prices fell and rebounded, at some point they won’t immediately rebound.  This will not only negatively impact stock portfolios; it will negatively impact consumer confidence and spending.  A pullback in consumer spending, if severe enough will lead to a recession.  Why?  Because consumer spending is the primary driver of economic growth today as business investment and trade are detracting from economic growth. 

INVESTMENT STRATEGY APPLICATION

These facts indicate the following as a prudent investment strategy:

Maintain a diversified portfolio with a clear defensive positioning

Maintain a portfolio that will do better in a slowing economic environment.  Said another way, maintain a portfolio that is less vulnerable to the negative impacts a slowing economy will have on the stock market and the ability of less financially strong companies’ ability to make their monthly interest payments.

              How?

  1. Reduce your allocation to stocks below your long-term target allocation 

For example, if your long-term allocation is 50% stocks, reduce to something less.  How much less depends on the following:

  1. How willing are you to possibly lose 10% to 20% in your stock portfolio AND have it remain down for a few years? 
  • Looking at it from the opposite perspective, how willing are you to miss out on the opportunity to buy stocks at 10% to 20% less than they are today?
  • When do you need to cash out your stocks?  The sooner you need to cash out your stocks the more you want to lower your allocation to stocks.
  • For your stock allocation, focus on:
  1. Stocks that are less dependent on economic growth or said another way, less impacted by slowing economic growth

These are often called Consumer Staples.  They make the goods people use every day.  Recession or not, people will need to eat, drink bathe, and brush their teeth. 

Companies that make or serve food are generally less dependent on economic growth.  During a recession you may cut back on eating ut, but you will still need to get your food somewhere.  Maybe it means buying prepared foods instead or cutting back on prepared foods, but you will still need to eat. 

Companies that make personal care products such as toothpaste, dental floss, shampoo, and deodorant are also less dependent on economic growth. 

  • Stocks with higher dividend yields

Today’s slowing economic growth and low yield environment make stocks with higher dividend yields attractive.  Higher dividend yielding stocks are generally less susceptible to the negative effects of slowing economic growth and, if you are going to be exposed to the volatility of the stock market, at least get a higher dividend yield. 

Consumer Staples, because of their lower growth prospects, often have higher dividend yields and as  result they not only offer lower sensitivity to slowing economic, they offer higher dividend yields.

Utilities also offer higher dividend yields.

  • Fortress balance sheets

When economic times get tough, slumping sales can lead to companies having challenges in paying their bills and making payments on their debt.

Companies with greater cash on hand and access to financing, will generally better weather economic downturns.  In a slowing economy, a strong balance sheet having adequate cash reserves and lower debt can provide a bulwark against slowing economic growth.  These companies are sometimes referred to as “blue chip” stocks or “large cap” stocks.  They are generally larger companies, typically found in the Dow Jones Industrial index or S & P 500 index.  Smaller stocks that would likely be more challenged during an economic downturn and reduced sales would be companies found in the Russell 2000. 

Note:  Not all large companies have strong balance sheets.  Some are heavily indebted. If you are going to choose individual stocks as opposed to an index or basket of stocks. evaluate each company’s balance sheet and importantly, access to financing.

  • For your fixed income allocation:
  1. Fortress balance sheets

Similar to when evaluating stocks, seek out bonds from companies with strong balance sheets.  This means companies that can safely meet their debt service obligations, have ample cash to supplement interim periods of slumps in cash flow, and access to additional financing to provide additional short-term financing to supplement lower cash flows when cash reserves are inadequate.  These companies typically have investment grade bond ratings.

Note: There can be meaningful variation in company balance sheets even among investment grade companies.  A meaningful economic slump and slowdown in sales would push some lower quality investment grade companies into non-investment grade status.  The lowest investment grade rating for S & P and Fitch is BBB- and Baa3 for Moody’s.

  • Fortress cash flows

When investing in fixed income, you don’t get paid more when company cash flow increases.  So, focus more on the companies having fortress cash flows.  These are companies that have steady, reliable income streams.  These can be less economically dependent companies like Consumer Staples.  They can also be utilities.  They can also be companies with a subscription service.  It can also be companies with what they call high switching costs.  Switching costs are the costs associated with switching from one product to another.  For example, switching from a Mac operating system to a PC operating system is expensive from the time involved alone. 

Did China’s Slowing Economy Just Ensure A July Fed Rate Cut?

Reading the press following Federal Reserve Chairman Powell’s testimony to the House Financial Services Committee committee last Wednesday, one would have been convinced that the Federal Reserve was going to cut rates by the end of July. It was largely portrayed as being as certain as death and taxes.

And while the odds are better than not that the Fed will cut rates by the end of July, especially given the subsequent weak GDP report from China, there was an irrational level of certainty based on what was known at the time. Despite being less than three weeks away, much can happen between now and the Federal Open Market Committee (FOMC) meeting, and it already has. But let’s start with the key points from Chairman Powell’s testimony to the House Financial Services Committee.

Powell’s prepared remarks began, “The economy performed reasonably well through the first half of 2019…” He repeatedly emphasized his commitment to keeping the economy performing well. He was focused on maintaining the current level of economic performance. That bodes well for a rate cut given his citing of “cross-currents” including domestic trade policy uncertainty and slowing economic growth.

Then it got very interesting. Subsequent to the testimony, the latest inflation reading excluding food and energy came in much stronger than expected. While the factors driving the surprise increase, including health care, are not expected to propel core upward inflation at the same pace going forward, it certainly should give pause to those betting on 100 percent certainty of a July cut. Conversely, one of the crosscurrents Powell mentioned as a concern, global growth, subsequently reared its head further with China reporting slowing GDP growth.

Also of interest, while pundits were practically guaranteeing a rate cut, Atlanta Federal Reserve Bank President Raphael Bostic presented a rosier economic picture less supportive of a rate cut, saying, “I am not seeing the storm clouds actually to generate a storm yet.” He went on to say, “With very few exceptions businesses are telling me the economy is performing as strong as it was.  They are not seeing weakness in consumer engagements.  And they are not materially changing their plans.” This does not sound like a man viewing a rate cut as a necessity and certainty.

Richmond Federal Reserve Bank President Thomas Barkin also presented a more optimistic picture than Powell. Barkin stated,  “I’ve been out in the last couple weeks and I’m talking to business people…They are not yet leaning back…they are not cutting jobs, they are not cutting investments that have already been underway.”

There are certainly some within the Fed with views more in line with Chairman Powell’s. New York’s Federal Reserve Bank President John Williams stated, “The arguments, for adding policy accommodation have strengthened over time.” Chicago Federal Reserve Bank President Charles Evans and Minneapolis Federal Reserve Bank President both went so far as to call  or a 50-basis point cut in rates.

While an eventual rate cut is a certainty, the timing is not, just as we know a recession is a certainty but not when it will strike. In the absence of certain knowledge of when either will happen, it is prudent for investors not to assign an irrationally high degree of probability to either occurrence.

To do otherwise would certainly expose investors to an unnecessarily one-sided bet and level of risk during a period of heightened uncertainty. Who knows, we may even get lucky and get a surprised trade deal with China between now and the end of July.  We can hope, can’t we?

PODCAST: Job Growth Accelerates and Equity Markets Retreat

In the odd but true category, equity markets again reacted negatively to a positive jobs report.

Despite the negative equity market reaction, this job report is good news for the economy and you.

Hear more on today’s Solutionomics podcast where you get real news and insight into the events shaping the nation’s economy, financial markets, government policy, and most importantly what it all means for you.

 

G-20 meeting was more about 2020 and Trump’s diminishing leverage than trade

As President Trump prepared to meet with Chinese President Xi Jinping at the G-20 summit in Osaka, Japan, most American analysts were focused on whether Trump would make a trade deal with China or play hardball and be willing to walk away from a deal.

Importantly, some incorrectly assumed that Xi was ready to make a trade deal with the U.S. Few asked, what if Xi wanted a trade deal, just not with this president? If Xi would rather deal with one of the Democratic contenders who debated in Miami, Xi would eschew a trade deal with Trump or at best agree to a truce.

While the eventual truce was celebrated by equity markets, the reality is that the billions of existing tariffs Trump already placed on Chinese goods remained in place as well as their negative effects on near-term U.S. economic growth.  Despite kicking the trade can down the road, nothing was resolved and if anything, President Trump’s weak bargaining position was highlighted by his reversal on Huawei and backing off of additional tariffs despite apparently gaining nothing.

The reality is that Trump’s leverage in negotiations with China is declining everyday we move closer to the 2020 election.  The second reality is that trade agreements have historically been more about foreign policy than about trade and if China’s president would rather try his luck in 2021 with one of the Democratic contenders, Trump will not get a trade deal.  This would be a significant headwind to his reelection bid as the economy is already slowing materially.  Trump is painfully aware of this as evidenced by the fact that he reportedly explored demoting the Federal Reserve chairman.

Employment growth, while still expanding, has decelerated, significantly falling from an average of 223,000 jobs per month in 2018 to an average of 164,000 jobs so far in 2019.

The manufacturing sector, a critical part of Trump’s base, is approaching contraction. It now stands at its lowest reading in nine years, according to the IHS Markit manufacturing Purchasing Managers index.

Business confidence is also waning. According to the most recent Duke Fuqua survey nearly 50 percent of CFOs believe the U.S will be in a recession by the second quarter of 2020. Whether or not they are correct, their pessimistic views will surely further temper what is already slowing hiring and business investment, constraining the employment and economic growth upon which incumbent presidents depend for reelection.

Then there are the U.S. financial markets. The 10-year Treasury rate is quickly heading toward 2 percent, causing the closely watched spread between 10-year and 3-month Treasury rates to invert. This has led many to wonder if a recession is on the horizon. Meanwhile, equity markets remain in a state of heightened angst, hanging on every presidential trade war tweet.

As the 2020 presidential election rapidly approaches, Trump needs a trade deal with China, or at least a truce until after the election. Xi knows this, which is why Xi got concessions on Huawei and a delay  of additional tariffs while Trump seemingly got nothing of real substance.  Looks like factors other than trade once again trumped trade negotiations.

 

Unlike President Xi of China, President Trump Is Not President for Life

Unlike the president of China, Donald Trump is not president for life. This and the political realities of facing reelection in the 2020 presidential election will likely force Trump into eventually making a deal with China.

The recent escalation in the trade war between the U.S. and China has investors, companies and Americans on edge, and for good reason. 

·       President Trump placed tariffs on an additional $200 billion of Chinese     goods on May 5;

·       China retaliated with additional tariffs on U.S. goods;

·       the U.S. blacklisted exports to Huawei Technologies, Co. followed by temporary exceptions and on and on it goes.  

However, just as investors were overly optimistic that the U.S. and China would avoid the May 5 tariffs, they now seem overly pessimistic viewing the trade war as having no end in sight.

With the passing of the deadline for forestalling additional U.S. tariffs on Chinese goods, there has been much speculation surrounding Trump’s thinking. 

What we do know, and what is most important, is one simple but powerful fact: Unlike China’s President Xi Jinping, President Trump is not president for life, and he has an election coming up soon.

To put it into business parlance, the Chinese president is like Warren Buffett while President Trump is like the CEO of a publicly traded company.

In March 2018, China removed term limits on its president. This is the equivalent in the world of business of not having to worry about quarterly results and instead having the mandate to prioritize long-term results over short-term gains. Think of Buffett, who possesses the power of a financial autocrat.

Because of the authoritarian nature of China’s political system, even if there is political discontent resulting from the negative economic and equity market impacts of a heightened trade war, the Chinese president can weather it. 

He can even use a trade war to his advantage, fanning the flames of nationalism by deftly portraying himself as standing up to the American president. This would shrewdly tie into strongly held feelings there that it is time for China to be seen and treated as an equal, not in a subservient manner.

Conversely, President Trump is more akin to the CEO of a publicly traded company that ignores the next quarter’s results at his or her peril. For President Trump, the key results are monthly employment numbers, the direction of equity markets and quarterly GDP growth. 

Adding to the pressure is the nearness of the 2020 presidential election. It is much more difficult for an incumbent president to win reelection during a recession. It is also difficult for a president to win reelection in an environment of malaise. Just ask former President Carter.

Volatile and declining stock markets along with slowing economic and job growth would be untenable for President Trump leading up to the U.S. presidential election. Trump’s political advisers will be aware of this. 

Additionally, the president has previously taken credit for the performance of the stock market and the economy. Declining equity markets and a significant slowing in economic growth would take away that argument in his reelection bid.   

In the end, it is likely that President Trump is forced to acquiesce, negotiate some high-profile but relatively modest “wins,” and claim victory.

There is precedent for this with the U.S.-Mexico-Canada Agreement. President Trump levied tariffs on goods from Mexico, Mexico retaliated, and then they made a deal that was more sizzle than substance. 

That is the best-case scenario. Trump is playing a dangerous game, a game that could easily lead to a miscalculation of the economic effects resulting in lost votes in 2020.

There is a saying that when you sow the wind, you reap the whirlwind. Let’s hope President Trump stops sowing the seeds of a growing trade war with China sooner rather than later. 

That will depend on whether the president calculates he needs continuing economic growth more than muffling coverage of the Mueller report and his tax returns. 

In the end, this will likely be a missed opportunity to even up the trade score with China. Tariffs can be effective, but they are ineffective when they are sudden and severe — as in the present case. Yes, you may get some token concessions that make good headlines, but real gains happen over time. 

Companies need time to change supply chains. Sudden tariffs don’t allow for that. Severe or punitive measures are very different from reciprocal tariffs. 

 

GM Layoffs Show Congress Played Americans with Flawed Corporate Tax Cuts

Less than 12 months after seeing its corporate tax rate slashed by Congress, General Motors (GM) announced it will lay off 14,000 workers. That doesn’t exactly fit the script some in Congress and the president laid out when pressing for passage of the Tax Cuts and Jobs Act (TCJA) in late 2017.

Either out of embarrassment or to hide their role in the scam of GM receiving massive tax cuts only to make massive job cuts, the president and some members of Congress reacted with swift indignation. Curiously, its chief proponents, House Speaker Paul Ryan (R-Wis.) and Rep. Kevin Brady (R-Texas) have been silent.

How could this happen? Were the president and Congress duped or was the American taxpayer duped, both by GM and our elected officials?

While it is infuriating to see a company receive significant tax cuts only to then fire thousands of Americans, it is critical to remember that those who voted for the TCJA made it possible — they were the enablers.

There are no requirements in the TCJA for companies to create jobs in order to receive a tax cut. Worse still, the TCJA allows companies to fire Americans and receive a tax cut, the same tax cut received by companies creating jobs.

The TCJA is either the most inept financial deal ever negotiated on behalf of the American taxpayer or a scam perpetrated against the American taxpayer by Congress and the president, both knowing very well what they were doing.

Could members of Congress and our president really have been duped this badly? Could they really have signed onto a tax policy that was so blatantly flawed without knowing it?

It stretches the imagination to believe that Congress and the president drafted and signed a bill without knowing that it would allow companies to fire Americans and still receive a drastically reduced tax rate.

What is plausible is that Congress and the president knew very well what they were doing and enabled GM in duping the American taxpayer. To find the truth, we simply have to look at comments by members of Congress and the campaign money trail.

In a previous opinion piece for The Hill, I noted that, in discussing passage of the TCJA, Rep. Chris Collins (R-N.Y.) stated, “My donors are basically saying, get it done or don’t ever call me again.”

In another illustration of the role campaign donations played in pressing for the TCJA, Sen. Lindsey Graham (R-S.C.) bluntly stated, “The campaign donations will stop.”

How big were the donations that were at risk? In the 2016 election cycle, GM alone donated more than $100,000 to the House Ways and Means Committee and more than $100,000 to the Senate Finance Committee, both of which oversaw the TCJA process.

Clearly, a lot of campaign donations were at stake. Putting together the campaign donations at risk along with the candid comments by Rep. Collins and Sen. Graham, it is not a stretch to assume that those who voted for the TCJA knew that companies firing Americans would receive the same tax cut as companies hiring Americans.

 

While Congress and the president are primarily to blame for GM being well within its right under the TCJA to fire 14,000 employees after receiving a tax cut, GM is not shooting straight with the American taxpayer.

GM cited declining sedan sales as the reason for its announced job cuts and its closing of four factories in the U.S. It is reasonable that if a product isn’t selling well you would stop producing it.

Here’s the catch, GM is manufacturing sedans in China and exporting some of them to the U.S. GM isn’t the only American company manufacturing cars outside of the U.S. and then exporting them to the U.S. for sale.

As I noted previously in another op-ed for The Hill, Lincoln assembles a mere 17 percent of its vehicles sold in the U.S. within the U.S., while Chrysler assembles a still meager 33 percent of the vehicles it sells in the U.S. within the U.S.

Interestingly, some foreign automakers assemble a much higher percentage of the vehicles they sell to U.S. consumers within the United States. For example, Acura assembles an impressive 71 percent of its U.S.-sold vehicles within the U.S.

It is ironic given all the talk of “America First” that the traditional American automotive manufacturers are making a smaller percentage of the cars they sell to U.S. consumers in the U.S. than foreign automotive manufacturers.

If you want more cars made in America, there is an alternative to tariffs: Tie the TCJA’s lower tax rate to increasing jobs in America. This would provide financial incentive for auto manufacturers to make cars in America while avoiding a trade war.

GM’s firing of 14,000 employees sadly shows that the American taxpayer got played by Congress and the president. All those in Congress who voted for the TCJA and the president who signed the bill enabled companies to fire Americans and still receive a massive tax cut.

Please don’t let there be hearings in which members of Congress who voted for the TCJA feign indignation — just fix it. It’s time Congress and the president make up for flaws in the TCJA by fixing them.

It is time the president and Congress to revise the TCJA to make the lower corporate tax rates contained in the TCJA contingent on companies increasing their number of full-time employees in the U.S. The American taxpayer deserves nothing less. It is time the American taxpayer is put first.