Money / Politics

Ground Truth on US Economy:  Good News Ahead

us-truth-economy-growthMany Americans end 2018 with natural questions about the US economy.  Here is ground truth:  Despite intermittent cross winds, generated by trade war talk, uncertainty about 2019 interest rate rises, slower growing Chinese and European 2018 growth, and both domestic and international political sword-crossing, the state of the US economy is objectively strong.

Start with the core data, since that is where all good analysis begins.  The Financial Times reports annualized third quarter 2018 growth was at 3.5 percent, and statistical modeling puts current 4th quarter 2018 growth – right now – at 3.37 percent.  These are huge numbers, likely to cast shafts of light into 2019.

By way of contrast, calendar year 2016 growth was at 1.5 percent, positive but barely so, with low consumer and business confidence.  The contrast with both 2017 – and 2018 – is marked.  The National Small Business Association observed, in late 2017, confidence was on a tear.  At the time, compared to one year earlier, 63 percent of 1,633 respondents said the national economy was better, 59 percent projected expansion in 2018, and 84 percent were confident about their own businesses.

They were also right about 2018, which has ushered in the strongest unemployment numbers in half a century, and across some long-forgotten demographics, the strongest ever.  Take a breath and think about this:  US unemployment has dropped from 10 percent in 2010 to just 3.7 percent this month, November 2018.

Here is added good news.  Even as US unemployment has fallen, the number of Americans reentering the labor market has risen, inflation has stayed low, and wage growth is creeping upward.  Even as US labor productivity has risen, core inflation has stayed at about 1.78 percent.  Although the stock market is volatile, the underlying health of most companies has repeated been affirmed – strong.

So what could go wrong?  And will it?  True, the Trump Administration is placing heavy pressure on international trading partners, particularly certain sectors of Chinese, European, Mexican and Canadian goods.  For the first time in a long time, words like tariffs, offsets, and bilateral are being used.  Unblinking acceptance of past agreements is coming in for scrutiny.

But take a hard look:  Truth is that a “return volley” was probably overdue.  NAFTA – a brave idea with multilateral benefits – had not been reviewed for 25 years.  Follow-on agreements with Canada and likely Mexico should – if the US Congress concurs – produce overdue rebalancing of trade across the hemisphere, fewer side agreements that slow growth.

Likewise, China has progressively undercut the United States at the World Trade Organization, through currency manipulation, and using a range of loopholes, permitting this Communist country to gobble up land, rights and businesses in foreign lands without traditional checks.  Then consider the security breaches and vulnerabilities that attend Chinese overreach, and one can understand the new sense of trading caution.

But is this the end of the world?  Is this the end of US economic growth, as China “retaliates” against this rebalancing attempt?  Not likely.  First, China needs internal and external growth, and already seems to be projecting a slower rate of growth for 2019.  Second, China is not unaware of its past practices; to be called out is embarrassing, but neither China nor the US wants – and neither will endure – a long term trade war.  The natural evolution will be a new trading arrangement, with greater accountability on both sides.  Arguably, when that agreement is announced, one should expect a bounce in both nations’ trade – and markets.

What about the Federal Reserve?  Will they keep raising rates without pause in 2019?  Not likely.  They have already just paused in December 2018, and there is no particular urgency in rate rises – at a given time or pace – next year.  Inflation does lag growth, but the Federal Reserve would hardly benefit from a recession right now, and so triggering one has to be on their mind.

What this really means is that, even as they clear their balance sheet and slowly reestablish the old “normal” for future rating cutting as needed, they are not likely to move fast or precipitously in 2019.  Markets like slow moves, and so a best guess is – barring some sudden indicator of inflation, which seems nowhere a concern – there should be measured rate normalization, nothing quick.

Last, what about all the political noise – talk of the Mueller report, indictments, a divided government and all the pans and spoons being banged by the modern media?  Well, sure, expect more of that.  We would be foolish to expect the political and media class to go quiet, to suddenly declare the economy healthy and all well in our world, just inviting back come 2020.  Not going to happen.

There will be lots of hand-wringing, rooftop shouting, and noise.  But will that affect your 401k, SEP or pension returns?  Not likely.  We know more hard facts, and we should take stock of them.  Whatever the Mueller report produces, it will be less dramatic than most progressives or anti-Trump detractors wish, because if there existed a “smoking gun” on “Russian collusion,” it would long ago have been leaked.

Second, impeachment – which is the constitutional remedy for anything amounting to a “high crime or misdemeanor” is dependent on a vote to impeach from both houses of Congress. In view of Republican Senate control, only a heinous act is likely to trigger such a vote in the Senate.  There is no evidence suggesting such an act.   As for other political noise, well, yes- expect it, investigations and subpoenas, hearings and headlines, and more from prospective 2020 candidates.  But take another deep breath; the markets will not likely pay great attention.

What does all this come to?  Just this.  The US growth rate, and all the fundamentals in 2018, have been objectively extraordinary.  Every year is not extraordinary, and 2019 may not top 2018.  But that is not the main point.  The main point is that the US economy is the strongest, fastest growing and likely most healthy in the world, even if we carry inordinate debt, worry over everything, and have become reflexively political.  If Adam Smith were alive, he might be after us to balance the budget pronto, cut the bloat of entitlements, and protect the future – but he would also recognize that 2018 was a great year, and 2019 is likely to be a strong one too!


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