Economic Insight

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Economic

Commentary

Economic Insight

July 22, 2016

LINDSEY M. PIEGZA

CHIEF ECONOMIST

(312) 454-3873

PIEGZAL@STIFEL.COM

The Presidential Election and the Economy

Economist Estimates

Economic Data Calendar

Prior High Low Median Stifel

Monday 25-Jul Dallas Fed Manf. Activity - Jul -18.3 -2.0 -13.0 -8.0 -10.0

Tuesday 26-Jul S&P/CS 20 City MoM - May 0.5% 0.4% -0.4% 0.1% -0.1%

Consumer Confidence Index - Jul 98.0 100.0 91.5 95.5 96.0

Richmond Fed Manufact. Index - Jul -7.0 -1.0 -7.0 -2.0 -5.0

New Home Sales - Jun 551k 575k 525k 558k 554k

New Home Sales MoM - Jun -6.0% 4.4% -4.7% 1.3% 0.5%

Wednesday 27-Jul Durable Goods Orders - Jun P -2.3% 2.0% -5.0% -1.3% -0.5%

Durables Ex Transportation - Jun P -0.3% 1.0% 0.0% 0.3% 0.2%

Pending Home Sales MoM - Jun -3.7% 3.0% 1.0% 1.8% 2.2%

FOMC Rate Decision (Upper Bound) - Jul 27 0.50% 0.75% 0.50% 0.50% 0.50%

FOMC Rate Decision (Lower Bound) - Jul 27 0.25% 0.50% 0.25% 0.25% 0.25%

Thursday 28-Jul Trade Balance - Jun -$60.6b -$60.0b -$63.8b -$61.2b -$60.5b

Initial Jobless Claims - Jul 23 253k 265k 249k 264k 275k

Kansas City Fed Manf. Activity - Jul 2.0 -- -- -- 2.5

Friday 29-Jul GDP Annualized QoQ - 2Q A 1.1% 3.5% 1.0% 2.6% 2.2%

Personal Consumption - 2Q A 1.5% 4.7% 2.7% 4.2% 3.1%

Chicago Purchasing Manager - Jul 56.8 55.0 50.5 54.2 52.5

U. of Mich. Sentiment - Jul F 89.5 92.5 89.5 90.1 89.0

Source: Bloomberg, Stifel

This week we had the pleasure of participating on a nonpartisan economic panel at the Republican

National Convention in Cleveland, Ohio. The intent of the panel was to assess the current trajectory

of the U.S. economy and address the implications -- both the benefits and risks -- of the economic

platforms of each presidential candidate. Recognizing that plan specifics are lean on both sides of

the aisle at this stage of the election, the panel focused more on broad-based themes implied from

some of the key components within each proposal.

Presidential Economy

Both presidential candidates, democratic nominee Hillary Clinton and republican nominee Donald

Trump, have pledged similar economic agendas: grow the US economy, increase domestic job

creation and boost wages for working Americans. Their respective proposals, however, aim to

achieve said goals from very different directions and with very dissimilar policy actions.

Trump’s economic plan focuses on offering incentives to individuals and businesses, while

expanding the government’s debt to spur headline economic activity and generate job and income

growth. Clinton’s economic plan, on the other hand, focuses on increasing taxes on the wealthiest

of Americans and ramping up government spending to achieve social goals such as income equality

with only a modest addition to the government’s debt.

Below we offer some of the key points from the candidates’ economic proposals and comments

from this week's economic panel discussion at the convention in Cleveland.

**Please note: Stifel neither supports nor opposes any candidate for public office.

Please see the last page of this

report for important

disclosures and disclaimers.

2016 Stifel, Nicolaus & Company, Incorporated One South Street, 15 th Floor Baltimore, MD 21202 Member NYSE Member SIPC 888.290.1762


Economic

Commentary

Economic Insight

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Wage Growth

One of the primary directives of the Clinton economic plan is to raise wages for working Americans. Over the past several

years, numerous state and local governments have pushed the minimum wage above the national requirement of $7.25, which

came into effect in 2009. Fourteen states have raised their minimum wage rates as of January 1 st , 2016; twenty-nine states

and the District of Columbia have wage requirements that exceed the federal mandate, some by more than $3 an hour. The

Clinton economic plan intends to raise the federal minimum wage requirement to as high as $12 to $15 an hour.

According to the Congressional Budget Office (CBO), raising the minimum wage to even $10 an hour would benefit more

than 16 million Americans and help lift nearly 900 thousand Americans above the poverty threshold. However, at the same

time, the CBO findings suggest that increasing the cost burden on businesses by raising the price of labor would result in a

net loss of jobs in the current economy; raising the minimum wage to $10 an hour would result in a loss of more than 500k

jobs or more than 1 million jobs lost at the $12 threshold.

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Economic

Commentary

Economic Insight

July 22, 2016

Federal Minimum Wage Rate

Source: Bloomberg

Some panelists noted that amid the recent push to artificially boost wages through elevated state-set minimum wage rates,

businesses have begun to vote with their feet, relocating from high cost states to alternatives with more favorable (lower)

labor costs, as well as to states with lower (or no) state income tax levels. Furthermore, rising labor costs have incentivized

many businesses to increase their reliance on technology, automating and replacing lower-skilled and service industry

positions. "[Have you] been to an airport lately? You're ordering from an IPad. You can thank a rise in the minimum wage

for that,” one panelist noted. “Of course...of course workers would always prefer to make more money and have a higher

salary but they first prefer to keep their job."

In some cases, however, it is argued that raising the minimum wage can actually benefit businesses by reducing employee

turnover and increasing worker productivity. Furthermore, raising the minimum wage can help prevent millions of full-time,

adult workers from living in poverty, allowing "more Americans to reap the benefits of this country's economic

prosperity." Nearly 50M Americans (or nearly 15% of the U.S. population) live in poverty. “These people deserve a chance

too... a wage a family can live on,” a panelist commented.

Tax Policy

One of the key directives of the Trump campaign is a reduced and simplified tax code for individuals and businesses. Among

the highlights, the Trump campaign has proposed a simplified income tax structure comprised of three brackets as opposed to

the current seven, with rate cuts across all three rungs and a top rate of 25%. The Trump tax plan would also include a

reduction in the corporate tax rate from 35% to 15% and an outright elimination of several taxes including the estate tax and

the corporate Alternative Minimum Tax.

Page | 3

2016 Stifel, Nicolaus & Company, Incorporated One South Street, 15 th Floor Baltimore, MD 21202 Member NYSE Member SIPC 888.290.1762


Economic

Commentary

Economic Insight

July 22, 2016

2016 Federal Income Tax Rates

Source: Tax Foundation

According to the nonpartisan tax research group Tax Foundation, the Trump tax plan would cut taxes by nearly $12 trillion

over the next decade and reduce government receipts by over $10 trillion. The findings further suggest that by significantly

reducing the tax burden on businesses and individuals, the Trump tax plan would lead to an 11% higher GDP over the longterm,

6.5% higher wages and 5.3 million new jobs. Without equally-sized, offsetting spending cuts, however, the Trump tax

plan would also increase the amount of government debt relative to the size of the economy to over 100% as opposed to the

estimated 86% if the current system remains in place for the next decade. While the Trump campaign maintains the proposed

tax plan would generate enough economic growth to pay for itself, some analysts suggest real economic growth would need

to accelerate by 160% to 390% to truly “offset” the loss in revenues.

By contrast, the Clinton economic plan contains $1.4 trillion in additional government expenditures including $275 billion in

infrastructure spending but proposes paying for the additional spending with $1.2 trillion in tax increases primarily on topincome

individuals and businesses. The majority of revenue would come from a cap on itemized deductions, the Buffet Rule,

and a 4% surtax on taxpayers with income exceeding $5 million, as well as a new long-term capital gains tax rate schedule to

incentivize investors to extend the holding periods for investments. According to the Tax Foundation, the Clinton plan

proposes only a minimal addition to the deficit beyond the anticipated rise based on the current trajectory. Furthermore, the

findings suggest over the next 10 years, the Clinton tax plan would lead to a 1% lower GDP, 311k fewer jobs and a reduction

in the federal debt by over $1.2 trillion.

A general point of agreement among the panelists at this week’s discussion was that one of the missing components in the

U.S. "recovery" following the Great Recession has been a lack of robust corporate investment. Negative for more than

seventeen consecutive months as of late, businesses remain hesitant to invest in equipment, structures, and high-wage, fulltime

employees. Businesses big and small continue to cite rising health care costs and ample regulation, as well as an everincreasing

and uncertain tax burden as lingering barriers to growth and expansion. Going forward, without business

development and investment, the U.S. Economy will be unable to grow beyond the current stagnant 2% GDP environment.

"It's very simple... A lower tax burden spurs job creation. That's what we need, more jobs,” one panelist said.

Page | 4

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Economic

Commentary

Economic Insight

July 22, 2016

U.S. Federal Debt % of GDP

Source: Congressional Budget Office

More recently, however, there is a reduced appetite among Americans for any further expansion of the government’s balance

sheet after rapid growth in the federal deficit for much of the past decade. Over the past eight years, thanks in part to an

extended war overseas, an extreme economic recession and costly stimulus spending, the federal deficit skyrocketed and did

not fall below $1 trillion until 2013. Meanwhile, the federal debt continues to mount, climbing to over 75% of GDP, the

highest level relative to the size of the economy since 1950. Of course, back then following WWII, the U.S. economy was

embarking on an incredible decade-long expansion posting over 4.5% GDP as opposed to the current, stagnant growth rate of

2.1% established since the end of the Great Recession. Based on the current lackluster trajectory of circa 2% GDP in the

long-run, the U.S. economy will be unable to grow its way out of today’s massive debt burden without strong accelerated

growth in the future, large spending cuts or massive tax increases, or some combination of the three.

Elected Proposal

In the end we are confident the American people support the candidates’ agendas to improve current economic conditions,

including generating more robust business investment, job creation and income growth. Nevertheless, the question remains,

what is the best policy action to achieve those goals? There is a trade-off from Trump’s proposal for immediate and arguably

rapid growth with a potentially longer-term expansion of the government’s balance sheet. There is an equally large trade-off

that comes from Clinton’s proposal for relative stability or mediocrity in topline activity with much improved social

conditions, which include more equitable wages and further investment in education and national infrastructure.

-Lindsey Piegza, Chief Economist

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Economic

Commentary

Economic Insight

July 22, 2016

Glossary

CBO – Congressional Budget Office

GDP – Gross Domestic Product

Page | 6

2016 Stifel, Nicolaus & Company, Incorporated One South Street, 15 th Floor Baltimore, MD 21202 Member NYSE Member SIPC 888.290.1762


Economic

Commentary

Economic Insight

July 22, 2016

This material is prepared by the Fixed Income Strategy Department of Stifel Nicolaus & Co (“Stifel”). This material is for

informational purposes only and is not an offer or solicitation to purchase or sell any security or instrument or to participate

in any trading strategy discussed herein. The information contained is taken from sources believed to be reliable, but is not

guaranteed by Stifel as to accuracy or completeness. The opinions expressed are those of the Fixed Income Strategy

Department and may differ from those of the Fixed Income Research Department or other departments that produce similar

material and are current as of the date of this publication and are subject to change without notice. Past performance is not

necessarily a guide to future performance. Stifel does not provide accounting; tax or legal advice and clients are advised to

consult with their accounting, tax or legal advisors prior to making any investment decision. Additional Information

Available Upon Request.

Stifel Nicolaus & Co is a broker-dealer registered with the United States Securities and Exchange Commission and is a

member FINRA, NYSE & SIPC. © 2016

ADDITIONAL INFORMATION AVAILABLE UPON REQUEST

Page | 7

2016 Stifel, Nicolaus & Company, Incorporated One South Street, 15 th Floor Baltimore, MD 21202 Member NYSE Member SIPC 888.290.1762

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