The “Big Beautiful Bill” the U.S. House recently passed would extend most of the 2017 tax cuts. The Congressional Budget Office and a majority of economists expect these tax cuts to increase the budget deficit, because concomitant spending cuts have not matched the tax-cut extension. Wisdom from these economists, or madness?
There is sniping that these expectations are partisan, but there are 12 states, including Minnesota, with credit ratings higher than the U.S. government. We think it’s likely the bulk of the 2017 tax cuts will stay in place, which has reduced some of the urgency around redrafting estate plans. This should still be closely watched, though, because approval is not guaranteed.
Can we expect credit card and loan balances to continue to decline? Tariffs will initially increase costs to consumers. When you increase friction on the lowest-cost providers — regardless of why their costs are low — costs inexorably rise.
Whether companies attempt to absorb some of these costs (resulting in lower profits) or pass them on to the consumer (resulting in less disposable income), something has to give. The likely effect of these increased costs is less consumer spending and potentially higher unemployment. An increase in costs is inflationary, while lower spending can be deflationary.
How the markets respond will in part depend on the expected duration of these added costs. If auto loan balances decline, it could be because people are buying fewer cars. Is it wisdom or madness to act as if it’s business as usual?
As you make financial planning decisions during these unpredictable times, it’s best to deal with what’s directly in front of you. Rather than guessing what could happen, as important as it will eventually be, focus on what’s happening now.
