Savings rate on the decline

Also…a look at savings rates in other countries

 

You don’t hear much about America’s personal savings rate these days, and the reason may be because the news is discouraging: collectively, the percentage of our income that we save is trending downward again, and may be about to hit record lows.  The Federal Reserve Bank of St. Louis tracks the U.S. personal savings rate, going back to the late 1950s, when people were setting aside a thrifty 11% of what they made.  Americans achieved a record 17% savings rate in the mid-1970s (see chart) before a long decline set in.  In 2013, the rate briefly spiked again above 10%, but as you can see from the chart, Americans have become less thrifty since then.  The most recent data point shows Americans saving just 3.6% of their income.

How does this compare to the rest of the world?  A chart on the Trading Economics website shows that most countries fall in the 4.5% to 10% range, but with considerable fluctuation.  For instance, Spain experienced a negative savings rate just last quarter, but this quarter reports a rate of more than 14%.  Japan and Mexico seem to be consistently the thriftiest of the reporting nations, each with savings rates above 20%.  (India’s rate on the chart appears to be in error.)

Does any of this matter?  Economists will tell you that when the savings rate is high, it cuts into consumption, which lowers economic activity.  But at the same time, countries with high savings rates have more capital to invest in their future, and their citizens tend to be less vulnerable to economic downturns.  On the whole, we should probably prefer more savings to less.

Sources:

https://tradingeconomics.com/united-states/personal-savings

https://fred.stlouisfed.org/series/PSAVERT

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Tax reform broken down for you

 

The New Tax Legislation

Chances are, you’ve heard that tax “reform” is right around the corner—that is, if you can call it “reform” when hundreds or perhaps thousands of new pages are about to be added to the tax code.  First, the White House released its tax legislation wish list.  Now the Republicans in the House of Representatives have released a proposal called the “Tax Cuts and Jobs Act,” which fleshes out some of the details.

The House bill would reduce the number of tax brackets from seven currently (10%, 15%, 25%, 28%, 33%, 35% and 39.6%) to four: 12% (up to $45,000 income for singles; $90,000 for joint filers), 25% ($200,000 single; $260,000 joint), 35% (over $500,000 for singles; $1 million joint) and 39.6% (above $1 million for single filers; $1.2 million joint).  The impact on any individual is complicated; people who are currently in the 15% bracket and the bottom of the 25% bracket would, under the new bill, pay taxes at a lower 12% rate.  People who were previously in the 28% bracket would tumble down into the 25% rate.  But people making between $20,000 and $40,000, and those between $200,000 and $500,000 would actually experience a tax increase as they move into a higher marginal rate.

It gets more complicated, because there’s effectively a fifth tax bracket that nobody is talking about, perhaps because it only impacts the highest-income Americans. Anybody who thinks tax “reform” is making the system less complicated should ponder how this would be calculated; once a person or couple have income sufficient to reach the top bracket, they would subsequently add on a 6% surtax to the amount over that top bracket threshold until the entire benefit of their 12% rate has been phased out.  In effect, individuals with taxable income between $1 million and $1.207 million, or joint filers with taxable income between $1.2 million and $1.614 million, would face a special 45.6% tax bracket.  After that, they revert back to the 39.6% rate.  This is simplification?

The dreaded alternative minimum tax would be eliminated under the new bill; however,  the AMT credit carry forwards would still be deductible.  The bill would continue the current capital gains rate structure of 0% (for those with up to $51,700 individual/$77,200 joint in taxable income), 15% (up to $425,800 individual/$479,000 joint) and a 20% rate for those in the top tax bracket.  The 3.8% Medicare surtax on net investment income (which includes capital gains and dividend income) would be retained, and be added onto the 15% and 20% capital gains rates.  So the actual capital gains rates would be 15%, 18.8% and 23.8%.

Meanwhile, the personal deduction and standard deduction would be combined into an expanded standard deduction of $12,000 for individuals, $24,000 for joint filers. Some families with more than three children would lose benefits under this proposal, since their personal deductions under the old system would have exceeded the expanded standard deduction in the newly proposed one.  A higher standard deduction, by itself, would reduce the number of people claiming itemized deductions, but in addition, the bill would greatly reduce the list of qualified deductions, reducing the number of itemizers even more.  Under the new proposal, people would no longer be able to deduct any state or local income taxes paid, but they WOULD be able to deduct local real property taxes (like a home and/or a vacation home) up to a maximum of $10,000 a year.  The mortgage interest deduction would be limited to debt on the first $500,000 of a home mortgage (down from $1 million today).

Miscellaneous deductions like the electric drive motor vehicle credit, the adoption tax credit and the credit for moving expenses to a new job would all be eliminated.

Corporate tax rates would be lowered dramatically.  The C-corporation (which is publicly traded companies) would see a maximum 20% tax rate, while pass-through companies like S corporations, partnerships and LLCs would be subject to a maximum rate of 25%–with some very complicated provisions designed to keep their owners from shifting personal income into and through the company to take advantage of potentially lower rates.

Finally, for the very few people who pay estate taxes, the good news is that the exemption limit, currently $5.6 million, would double to $11.2 million per person, $22.4 million for married couples—and the estate tax, according to the language of the bill, would be eliminated altogether in 2024. Gift tax limits would also go up to the exemption amounts.

Would any of this affect your tax bill in 2017?  No.  The provisions, if enacted, would impact the 2018 tax year.

What are the odds of passage?  Who knows?  The Senate is reported to have its own ideas about tax “reform.”

Sources:

http://tinyurl.com/yagsu3a6

http://www.philly.com/philly/wires/ap/news/nation/washington/20171103_ap_56e8af4796944f54a5532a36691c5395.html

https://www.bloomberg.com/news/articles/2017-11-03/house-tax-cuts-don-t-fully-pay-for-themselves-analysis-finds?cmpid%3D=socialflow-twitter-politics

https://www.yahoo.com/finance/news/apos-trump-apos-tax-plan-184700638.html

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Complete tax system overhaul…hmm

Tax reform or…not?

You can be forgiven if you’re skeptical that Congress will be able to completely overhaul our tax system after failing to overhaul our health care system, but professional advisors are studying the newly-released nine-page proposal closely nonetheless.  We only have the bare outlines of what the initial plan might look like before it goes through the Congressional sausage grinder:

We would see the current seven tax brackets for individuals reduced to three — a 12%, rate for lower-income people (up from 10% currently), 25% in the middle and a top bracket of 35%.  The proposal doesn’t include the income cutoffs for the three brackets, but if they end up as suggested in President Trump’s tax plan from the campaign, the 25% rate would start at $75,000 (for married couples), and joint filers would start paying 35% at $225,000 of income.

 

The dreaded alternative minimum tax, which was created to ensure that upper-income Americans would not be able to finesse away their tax obligations altogether, would be eliminated under the proposal.  But there is a mysterious notation that Congress might impose an additional rate for the highest-income taxpayers, to ensure that wealthier Americans don’t contribute a lower share than they pay today.

 

The initial proposal would nearly double the standard deduction to $12,000 for individuals and $24,000 for married couples, and increase the child tax credit, now set at $1,000 per child under age 17.  (No actual figure was given.)

 

At the same time, the new tax plan promises to eliminate many itemized deductions, without telling us which ones other than a promise to keep deductions for home mortgage interest and charitable contributions.  The plan mentions tax benefits that would encourage work, higher education and retirement savings, but gives no details of what might change in these areas.

 

The most interesting part of the proposal is a full repeal of the estate tax and generation-skipping estate tax, which affects only a small percentage of the population but results in an enormous amount of planning and calculations for those who ARE affected.

 

The plan would also limit the maximum tax rate for pass-through business entities like partnerships and LLCs to 25%, which might allow high-income business owners to take their gains through the entity rather than as income and avoid the highest personal brackets.

 

Finally, the tax plan would lower America’s maximum corporate (C-Corp) tax rate from the current 35% to 20%.  To encourage companies to repatriate profits held overseas, the proposal would introduce a 100% exemption for dividends from foreign subsidiaries in which the U.S. parent owns at least a 10% stake, and imposes a one-time “low” (not specified) tax rate on wealth already accumulated overseas.

 

What are the implications of this bare-bones proposal?  The most obvious, and most remarked-upon, is the drop that many high-income taxpayers would experience, from the current 39.6% top tax rate to 35%.  That, plus the elimination of the estate tax, plus the lowering of the corporate tax (leading to higher dividends) has been described as a huge relief for upper-income American investors, which could fuel the notion that the entire exercise is a big giveaway to large donors.  But the mysterious “surcharge” on wealthier taxpayers might take away what the rest of the plan giveth.

 

But many Americans with S corporations, LLCs or partnership entities would potentially receive a much greater windfall, if they could choose to pay taxes on their corporate earnings at 25% rather than nearly 40%.  (Note: The Trump organization is a pass-through entity.)

 

A huge unknown is which deductions would be eliminated in return for the higher standard deduction.  Would the plan eliminate the deduction for state and local taxes, which is especially valuable to people in high-tax states such as New York, New Jersey and California, and in general to higher-income taxpayers who pay state taxes at the highest rate?

 

Currently, about one-third of the 145 million households filing a tax return — or roughly 48 million filers — claim this deduction.  Among households with income of $100,000 or more, the average deduction for state and local taxes is around $12,300.  Some economists have speculated that people earning between $100,000 and around $300,000 might wind up paying more in taxes under the proposal than they do now.  Taxpayers with incomes above $730,000 would hypothetically see their after-tax income increase an average of 8.5 percent.

 

Big picture, economists are in the early stages of debating how much the plan might add to America’s soaring $20 trillion national debt.  One back-of-the-envelope estimate by a Washington budget watchdog estimated that the tax cuts might add $5.8 trillion to the debt load over the next 10 years.  According to the Committee for a Responsible Federal Budget analysis, Republican economists has identified about $3.6 trillion in offsetting revenues (mostly an assumption of increased economic growth), so by the most conservative calculation the tax plan would cost the federal deficit somewhere in the $2.2 trillion range over the next decade.

 

Others, notably the Brookings Tax Policy Center (see graph) see the new proposals actually raising tax revenues for individuals (blue bars), while mostly reducing the flow to Uncle Sam from corporations.

 

These cost estimates have huge political implications for whether a tax bill will ever be passed.  Under a prior agreement, the Senate can pass tax cuts with a simple majority of 51 votes — avoiding a filibuster that might sink the effort — only if the bill adds no more than $1.5 trillion to the national debt during the next decade.

 

That means compromise.  To get the impact on the national debt below $1.5 trillion, Congressional Republicans might decide on a smaller cut to the corporate rate, to something closer to 25-28%, while giving typical families a smaller 1-percentage point tax cut.  Under that scenario, multi-national corporations might be able to bring back $1 trillion or more in profit at unusually low tax rates, and most families might see a modest tax cut that will put a few hundred extra bucks in their pockets.

 

Alternatively, Congress could pass tax cuts of more than $1.5 trillion if the Republicans could flip enough Democratic Senators to get to 60 votes.  The Democrats would almost certainly demand large tax cuts for lower and middle earners, potentially lower taxes on corporations and higher taxes on the wealthy.  Would you bet on that sort of compromise?

 

 

 

 

Sources:

 

https://www.yahoo.com/finance/news/trump-overpromising-tax-cuts-205013012.html

 

https://www.aei.org/publication/the-big-six-tax-reform-framework-can-you-dynamically-score-a-question-mark/

 

https://www.washingtonpost.com/blogs/plum-line/wp/2017/09/27/trumps-new-tax-plan-shows-how-unserious-republicans-are-about-governing/?tid=sm_tw&utm_term=.d37e0bcf718d

 

https://www.yahoo.com/finance/news/hidden-tax-hikes-trumps-tax-cut-plan-202041809.html

 

https://www.yahoo.com/finance/news/republicans-700-million-problem-could-173027048.html

 

https://www.yahoo.com/finance/news/trumps-tax-plan-just-got-180000645.html

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Ways to curb the urge to splurge

 

How do you stop yourself from overspending? 

The urge to splurge is one of the toughest challenges to a monthly budget, and leads to unhappy encounters with the credit card statement.  But psychologists say there are solutions for the chronic overspender.

The first thing to understand is that overspending is viewed as a way to boost our self-esteem or overcome sadness—and if you consider it rationally, an extra pair of boots or a stylish pair of wireless headphones is not likely to provide that comfort for more than a minute or two.

So before you buy, create some space between the spending impulse and the action by asking yourself how you’re feeling.  Bored?  Sad?  Irritated about something at work?

That gets you closer to understanding the nature of the urge.  Then ask yourself: do you really need whatever you’re holding n your hand?  If the answer is not an immediate yes, then put it back on the shelf.  What if you wait?  Is there any risk to waiting a day or two to make sure it’s a good buy?

Finally, an overspender can ask: how will I pay for it?  Is this item in my monthly spending budget?  Do I even have a place to put it?  Often the urge to spend will pass after a few minutes, and might go away altogether for people who pass a 24-hour rule for purchases: if you still feel like you need it, you’ll come back tomorrow and get it.

This won’t cure the urges, but it might cure the most destructive consequences of them.

Source:

https://www.nerdwallet.com/article/crush-impulse-buying-with-these-4-jedi-mind-tricks?utm_campaign=ct_prod&utm_source=syndication&utm_medium=wire&utm_term=lizlizweston-com&utm_content=448090

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8 Mistakes To Avoid in Estate Planning

 

Common estate planning mistakes

The most common way to transfer assets to your heirs is also the messiest: to have a will that is so out of date that it doesn’t relate to your property or estate, to have your records scattered all over the place, to have social media, banking and email accounts whose passwords only you can find—and basically to leave a big mess for others to clean up.

Is there a better way?

Recently, a group of estate planning experts were asked for their advice on a better process to handle the transfer of assets at your death, and to articulate common mistakes.  The list of mistakes included the following:

Not regularly reviewing documents.  What might have been a solid plan 15 or 20 years ago may not relate to your estate today.  The experts recommended a full review every three to five years, to ensure that trustees, executors, guardians, beneficiaries and healthcare agents are all up-to-date.  You might also consider creating a master document which lists all your social media and online accounts and passwords, so that your heirs can access them and close them down.

Using a will instead of a revocable trust.  This relates mostly to people who want to protect their privacy.  When assets pass to heirs via a will, the transfer creates a record that anybody can access and read.  A revocable trust can be titled in your name, and you can control the assets as you would with outright ownership, but the assets simply pass to your designated successor upon death.

Failing to fund the revocable trust.  You’ve set up the trust, but now you and your team of professionals have to transfer title to your properties out of your name and into the trust, with you as the trustee.  If you forget to do this, then the entire purpose of the trust is wasted.

Having assets titled in a way that conflicts with the will or trust.  You should always pay close attention to the beneficiary designations, because they—not your will—determine who will receive your IRA assets.  Meanwhile, assets (like a home) owned in joint tenancy with rights of survivorship will pass directly to the surviving joint tenant, no matter what the will or trust happens to say.

Not using the annual gift exemption.  People can gift $14,000 a year tax-free to heirs without affecting the value of their $5.49 million lifetime gift exemption.  That means a husband and wife with four children could theoretically gift the kids $112,000 a year tax-free.  That can reduce the size of a large estate potentially below the gift exemption threshold, and in states where there is an estate tax, it can help there as well.

Not understanding the generation-skipping transfer tax.  A husband and wife can each leave estate values of $5.49 million to any combination of individuals.  But if there’s anything left over, there’s a 40% federal estate tax on those additional assets left to heirs in the next generation (the children), and an additional 40% on assets left to the generation after that (the grandchildren).  Better to transfer $5.49 million out of the estate before death (tax-free, since this fills up the lifetime gift exemption) into a dynastic trust for the benefit of the grandchildren.  You can also transfer that annual $14,000 to grandchildren.

Not taking action because of the possibility of estate tax repeal.  Yes, the Republican leadership in Congress includes, on its wish list, the total repeal of those estate taxes.  But what if there’s no action, or a compromise scuttles the estate tax provisions at the last minute?  Federal wealth transfer taxes have been enacted and repealed three times in U.S. history, so there’s no reason to imagine that even if there is a repeal, the repeal will last forever.  Meanwhile, dynastic trusts and other estate planning tactics provide tangible benefits even without the tax savings, including protecting assets from lawsuits and claims.

Leaving too much, too soon, to younger heirs.  Nothing can harm emerging adult values quite like realizing, as they start their productive careers, that they actually never need to work a day in their lives.  The alternative?  Create a trust controlled by a trusted family member or a corporate trust company until the beneficiaries reach a more mature stage of their lives, perhaps 30-35 years old.

 

 

 

 

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Wellness and financial goals…hand in glove

 

Health and Financial Wellness

 

Your financial plan is about your goals and finances.  But is it also about your health?

In a recent blog post on the Forbes.com website, financial planner and medical professional Carolyn McClanahan suggests that your health status may be a crucial input into your overall financial plan.

Why?  Because it helps you know how long your money will need to last—in other words, your longevity.  If you have significant health issues at an early age, then you can probably spend more during retirement, and use up your nest egg faster, than if you’re hale and your family history has close relatives living past age 100.

The default assumption has been that people will live to the age on a standard life expectancy calculator—which would say, for instance, that a person age 49 has a 50% chance of living past age 85.  But people who live a healthy lifestyle probably have a proportionately greater “risk” of outliving their life expectancy, while a chronically overweight smoker might be expected to contribute to the other side of the statistics.  In general, financial planning clients tend to be smarter and wealthier, which suggests that they’ll outlive the statistical averages.

McClanahan routinely estimates that her healthy clients will live to age 100.  For people with health concerns, she asks that they visit livingto100.com, which is an online questionnaire/calculator that asks health-related questions and then tells you how long you can expect to live based on more than just the actuarial statistics.  She tested it out with her “real” (healthy lifestyle) information and the site estimated she would need to financially prepare for living to age 102.  When she gave different information—when she described herself as an overweight, beer-guzzling junk food eater and smoker—her life expectancy shifted to age 63.  What a difference!

And, of course, the lifestyle component is only part of it.  If you have chronic conditions, if you’ve been diagnosed with cancer or have other significant health concerns, you can throw the averages out the window.  The point: your health and lifestyle can greatly affect the assumptions in your financial plan, and should not be ignored.

Source:

https://www.forbes.com/sites/carolynmcclanahan/2014/04/21/why-you-should-discuss-health-with-your-financial-planner/#53b06a2754f9

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Current bull market churns on

2017 Third Quarter Report

The last few years of a bull market are always a bit of a mystery to professional investors; the market rises faster than it did in the early, cautious years when nobody believed there WAS a bull market, even though there appear to be fewer fundamental or economic reasons for it.  The current bull market churns on, even if nobody can explain it, and people who bail out in anticipation of a downturn do so at the risk of missing out on an untold number of months or years of (still somewhat inexplicable) gains.

A breakdown shows that just about everything gained at least modestly in value these last three months.  The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—rose 4.59% for the most recent quarter, finishing the first three fourths of the year up 13.72%.  The comparable Russell 3000 index is up 13.91% for the year so far.

Looking at large cap stocks, the Wilshire U.S. Large Cap index gained 4.50% in the third quarter, to stand at a 14.19% gain so far this year.  The Russell 1000 large-cap index finished the first three quarters with a similar 14.17% gain, while the widely-quoted S&P 500 index of large company stocks gained 3.96% for the quarter and is up 12.53% in calendar 2017.

Meanwhile, the Russell Midcap Index has gained 11.74% so far this year.

As measured by the Wilshire U.S. Small-Cap index, investors in smaller companies posted a 5.39% gain over the third three months of the year, to stand at a 9.55% return for 2017 so far.  The comparable Russell 2000 Small-Cap Index is up 10.94% this year, while the technology-heavy Nasdaq Composite Index rose 5.79% for the quarter and is up 20.67% in the first three quarters of the year.

CA - 2017-9-20 - Capturing Bull Markets (2)

As nice as the returns have been domestically, international stocks this year have been even kinder to investment portfolios.  The broad-based EAFE index of companies in developed foreign economies gained 4.81% in the recent quarter, and is now up 17.21% in dollar terms for the first nine months of calendar 2017.  In aggregate, European stocks have gone up 19.87% so far this year, while EAFE’s Far East Index has gained 12.31%.  Emerging market stocks of less developed countries, as represented by the EAFE EM index, rose 7.02% in the third quarter, giving these very small components of most investment portfolios a remarkable 25.45% gain for the year so far.

Looking over the other investment categories, real estate, as measured by the Wilshire U.S. REIT index, posted a meager 0.61% gain during the year’s third quarter, and is now up 2.44% for the year so far.  The S&P GSCI index, which measures commodities returns, gained 7.22% for the quarter but is still down 3.76% for the year.  By far the biggest component is the ever-unpredictable price of oil.  Since the bottom on February 11, 2016, crude oil prices have actually risen by 50%, but the trajectory has been choppy and unpredictable.

In the bond markets, you know the story: coupon rates on 10-year Treasury bonds have risen incrementally from 2.30% at this point three months ago to a roaring 2.33%, while 30-year government bond yields have also risen incrementally, from 2.83% to 2.86%.

One might imagine that the uncertainties around government policy and fundamental economic issues (failed attempts to repeal the Affordable Care Act and a new promise to write a new tax code, for example) would spook investors, and if those weren’t scary enough, there’s the nuclear sabre rattling sound coming from North Korea.  Hurricanes have disrupted economic activity in Houston and large swaths of Florida, while Puerto Rico lies in ruins.  Yet the bull market sails on unperturbed.

How can this be?  Because if you look past the headlines, the underlying fundamentals of our economy are still remarkably solid this deep into our long, slow economic expansion.  Corporations reported a better-than-expected second quarter earnings season, with adjusted pretax profits reaching an annualized $2.12 trillion—which means that American business is still on sound footing.  Unemployment continues to trend slowly downward and wages even more slowly upward.  The economy as a whole grew at a 3.1% annualized rate in the second quarter, which is at least a percentage point higher than the recent averages and marks the fastest quarterly growth in two years.  There is hope that the new tax package will prove as business-friendly as the Trump Administration is promising.

Economists tell us that the multiple whack of hurricane damage will slow down economic growth figures for the third quarter, although the building boom fueled by the destruction will mitigate that somewhat.  There are no economic indicators that would signal a recession on the near horizon, and one of the potential panic triggers—a Federal Reserve Board decision to recklessly raise interest rates—seems unlikely given the Fed’s extremely cautious approach so far.

Meanwhile, as you can see from the accompanying chart, fourth quarters have historically been kind to investors—much kinder than third quarters.

There are still potential speed-bumps down the road.  The Trump Administration has threatened multiple trade wars with America’s major trading partners: the NAFTA members Canada and Mexico, and with China.  Tight immigration rules could lead to limited labor supplies.

But it’s hard to be pessimistic when your portfolio seems to grow incrementally every quarter.  The current 12-year stretch of economic growth below 3% a year is America’s longest on record.  But if the U.S. charts a prudent economic course, it’s possible that the current expansion could at least set new records for longevity.  This current expansion just turned 99 months old.  The all-time record is 120 months, from 1991 to 2001.  We may have to wait two more years for the next great buying opportunity in U.S. stocks.

Sources:

Wilshire index data: http://www.wilshire.com/Indexes/calculator/

Russell index data: http://www.ftse.com/products/indices/russell-us

S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–

Nasdaq index data:

 http://quotes.morningstar.com/indexquote/quote.html?t=COMP

http://www.nasdaq.com/markets/indices/nasdaq-total-returns.aspx

International indices: https://www.msci.com/end-of-day-data-search

Commodities index data: http://us.spindices.com/index-family/commodities/sp-gsci

Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

Bond rates:

http://www.bloomberg.com/markets/rates-bonds/corporate-bonds/

 General:

 http://www.marketwatch.com/(S(jpgxu155hzygvlzbebtr5r45))/story/what-rose-in-the-third-quarter-stocks-bondsbasically-everything-2017-09-29?link=MW_story_latest_news

http://www.marketwatch.com/(S(jpgxu155hzygvlzbebtr5r45))/story/economys-2nd-quarter-growth-raised-to-31-2017-09-28?link=MW_story_latest_news

 http://www.marketwatch.com/(S(jpgxu155hzygvlzbebtr5r45))/story/us-economy-likely-to-speed-up-in-2018-but-not-shatter-any-records-2017-09-25?link=MW_latest_news

 

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