February’s Gears and Gadget event was well-suited to the answer the big question many business owners and executives have today: where is the economy headed so I can plan? To help provide insight for business leaders, Economist King Banaian, dean of the School of Public Affairs at St. Cloud State University, gave a presentation focused on key manufacturing industry trends as well as how they fit into the larger Minnesota, U.S., and Global economic picture.

According to Mr. Banaian’s presentation and commentary, we live in a time of uncertainty. Uncertainty is normally a headwind. The end of uncertainty, however, can be a tailwind. Elections tend to be a period of heightened uncertainty, but the outcome removes it. Here are a few quick facts and summarized statements from Mr. Banaian’s presentation: Economic Headwinds or Tailwinds? 


  • Border-adjusted income tax remains a hot topic of tax reform. In a nutshell, if the GOP proposed border-adjustment tax rules are implemented, companies that use imported goods or services in making those goods cannot deduct their costs from revenues. Standard economic theory says that prices will adjust in the market to compensate. However, Mr. Banaian asks can your business actually pass on the costs? It depends on a lot of factors and not always easy or an option.

 

  • The impact on businesses from the (proposed) border-adjusted tax is explained in an example: Three firms with identical $100 of revenue and $60 cost of goods sold. Tax rate is 20%. Ergo, after tax profit is $32. 
    • Firm 1 does all its business in the US – suppliers and sales. There will be no impact. 
    • Firm 2 buys all its inputs from foreign sources, sells only in US. This firm can’t deduct $60 from its revenue, after tax profit falls to $20.
    • Firm 3 buys all its inputs from US sources, sells it all overseas. This firm is not taxed on earnings, after tax profits are $40 + $12 = $52.
    • However – Exchange rates are not factored in the above example. Businesses will need to offset exchange rates and watch how the global economy reacts to trade policies and market factors.

 

  • Manufacturing output growth has been almost entirely due to productivity. Job growth in the U.S. has gone to sectors known for relatively low productivity (i.e. construction, retail, hospitality) or difficult to measure (healthcare, finance).

 

  • Manufacturing productivity remains under pressure from, among other things, skilled labor shortage, slowing and retiring labor force, less than robust growth in capital inputs, etc.

 

  • Mr. Banaian’s opinion on where growth in manufacturing can come from?
    • Business investment that adds capital-per-worker
    • Increased labor skills + education
    • Innovation. Are you an entrepreneur or a business owner?