There’s an old adage that says if you ask four lawyers for their opinions on the same issue, you’ll get five different answers.
The same could be said about economists – particularly now, when the nation’s fiscal condition seems subject to frequent, drastic fluctuations, often on a daily basis, and periods when the stock market seems to flourish on one day and tank the next.
We are currently approaching the halfway point of the second year of President Donald Trump’s first presidential term. The chief executive weathered early predictions that economic disaster would reign, yet the financial picture was not only maintained but improved.
The stock market soared like an eagle when Trump first became the occupant of 1600 Pennsylvania Ave., though it has fallen on many occasions in more recent times. Ordinary citizens are finding more money in their pay envelopes these days, in spite of claims by wrongheaded politicians who feel that this money represents naught but “crumbs.”
In an effort to get a balanced picture of the nation’s monetary situation, we turned to a couple of leaders in the field of finance and economics to get their take on what is happening with the American dollar and why we can’t seem to get a straight answer upon which to build a strong opinion.
“Broadly speaking, the prospects for continued economic expansion in 2018 look reasonably bright,” said William Dudley, president of the Federal Reserve Bank of New York. In a recent speech, he said: “The economy is likely to continue to grow at an above-trend pace, which should lead to a tighter labor market and faster wage growth.”
“Over the longer term, however, I am considerably more cautious about the economic outlook,” he added. “Keeping the economy on a sustainable path may become more challenging.”
He said the recently passed Tax Cuts and Jobs Act of 2017 is likely to provide “additional support to growth over the near term, [but] it will come at a cost.”
“The [aforementioned] legislation will increase the nation’s longer-term fiscal burden, which is already facing other pressures, such as higher debt service costs and entitlement spending as the baby boom generation retires.”
“While this does not seem to be a great concern to market participants today, the current fiscal path is unsustainable. In the long run, ignoring the budget math risks driving up longer-term interest rates, crowding out private sector investment and diminishing the country’s creditworthiness. These dynamics could counteract any favorable direct effects the tax package might have on capital spending and potential output.”
In addition, the U.S. economy should be well supported by the recent improvement in the global economic outlook. More synchronized cyclical recoveries in Europe and Japan—and a revival of growth in many emerging market economies—should ensure that demand for U.S. goods and services remains strong.
“Putting it all together, I have raised my real GDP forecast for 2018 by about half a percentage point to three-quarters of a percentage point – from a 2½ percent to 2¾ percent range. About one-third of this upward revision reflects the firmer momentum of the economy going into 2018 and about two-thirds the simulative impact of the tax legislation.
Bill Conerly, a contributor to Forbes magazine, offered the following suggestions: “My economic forecast for 2018 is moderately positive, as I explained in recent articles detailing predictions for housing, consumer spending, and business capital spending. But things could go wrong, even so far as a recession. Anyone who is absolutely convinced that we cannot avoid a recession this year is far too overconfident in his or her ability to understand the economy.”
The more likely cause of a downturn this year would be a sharp cutback by consumers. I cautioned in my earlier consumer spending forecast that growth of spending is significantly greater than the growth of incomes. There are always grumpy people complaining that others are spending beyond their means, but the aggregate data don’t support that hypothesis.”
“However, over the course of 2017, the savings rate has dropped as consumers’ lower income growth did not trigger slower spending growth. And note this discussion is about growth rates, not the actual level of spending. I think its likely consumers will cut back a little, with a risk that they cut back a lot. The usual trigger of spending reductions is a loss of jobs—not happening lately, and not going to happen unless something else is the cause.”
“The stock market appears to have priced in all possible good news, and a little disappointment to investors could prompt a sell-off. The impact of the stock market on the economy, though, is usually much smaller than the reverse: how the economy affects the stock market. The channel of causation usually works through business capital spending, which is weak when stock prices are low.
“None of the potential causes of a 2018 downturn seem very strong,” said Conerly. “However, a number of small probabilities do add up to a bigger probability of something going wrong. In my own estimation of the risk of recession, I’m throwing in of some caution based on the track record of economists in predicting recessions. We have not done a very good job in the past, so we should be humble about whether we’ll see the next one coming period.”
Despite everything that has been said by highly enlightened people – the kind of people I respect, even though our opinions differ — I do not believe we will have a recession in the short term. Quite the opposite, in fact. The investments made by foreign companies demonstrate the confidence investors have worldwide. And the return of American companies re-establishing their bases in the USA proves this to be true.