Dr. Vince Malanga, President of LaSalle Economics, says that fortunately, the budget resolution, which includes an extension of the 2017 tax cut, passed the House by the narrowest of margins. However, he notes the Senate version is significantly different, requiring reconciliation. Neither version includes full retroactive expensing of capital equipment investment, despite presidential support. With a possible government shutdown looming, formal legislation may not be enacted until mid-spring.
Tariffs, now back on with exemptions, have blunted budget progress, contributing to market turbulence and consumer confusion, Malanga notes. Business decisions are being delayed, capital expenditures are weakening, and the economy is barely growing this quarter. Fiscal drag is beginning to assert itself, suggesting further weakness ahead.
Tariff-induced inflationary pressures are not a primary concern, as energy prices are declining, Malanga observes. He says the labor market is showing warning signs, with jobless claims rising in the Capital area and weak aggregate hours worked. Employers may start cutting payrolls if demand remains soft, pressuring income and spending.
The housing market remains sluggish, with fiscal drag from the Department of Government Efficiency replacing prior government stimulus. Malanga says the Federal Reserve may need to ease monetary policy quickly and meaningfully to support housing and capital spending. However, he adds there is concern that an undue focus on tariffs and tax cuts could delay needed agility from the Fed.
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