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That Economic Voodoo that You Do!

Dan Smith - Saturday, January 13, 2018

“Of all the tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive.  It may be better to live under robber barons than under the omnipotent moral busybodies.  The robber barons cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end, for they do so with the approval of their own conscience.[1] C.S. Lewis

First off, I want to reach back out to all the veterans that wrote or contacted me regarding my last article, “Taking a Knee”. I just want to let you know, I am the one who is so thankful for all of you. If it were not for folks like you, who put everything on the line, I surely wouldn’t have been able to write that column. So I am humbled by your sacrifice and service to our country. And I am proud if anything I wrote, felt like I spoke for you in some small way. And… that’s the reason I love doing VA loans!

 Next if you’ve followed me over the years, you know it once again time for my annual economic forecast. As such, I always begin with a review of my predictions last year. So let’s see how I did. I predicted that tax reform would get done in 2017, but missed slightly in thinking there would be any Democrat support. Such is the highly polarized political environment these days. The biggest take away here was that we did drop from the third highest corporate tax rate in the world at 38.9% to 21%[2]. That puts us slightly below the world wide average of 22.5%[3], making us now very competitive!

 I also predicted a dramatic repeal of economic stifling regulations – the third highest in US history[4]. I pointed out then that in 2016 alone, regulations had drained $1.885 trillion out of the economy[5], or what amounted to approximately 10% of our GDP. I am happy to report that the current administration has struck down some 860 rules and regulations, from the Obama administration alone[6]. Maybe that is why the Dow Jones index is up 26% in a single year…just saying. LOL! No wonder my liberal friends hate this “trickle down” economic plan, but I bet they love what it has done for their 401Ks!

 I was wrong in prediction a single month increase in jobs of at least 500K. However, the unemployment rate has dropped from 4.9% to 4.1%[7]. On the other hand, the labor force participation rate has remained pinned around 63%, compared to the nearly 66% rate in 2009. So the unemployment rate itself could actually begin to rise, as new jobs are added. That will likely happen, as some the 95 million not counted in the labor force under the prior administration re-enter the workforce. That said, existing home sales just reached an 11 year high[8]. And by the end of 2017, we will have three quarters in a row of GDP growth in excess of 3%. A feat never accomplished by the former administration[9].

 So what do I see in store for 2018? Well to a large degree, I see more of the same rapid expansion of the economy. With new home sales just hitting a 10 year high[10], and the aforementioned 11 year high on existing home sale, I think we will see a spectacular boom in construction. That will be bolstered by the need to rebuild in several recently devastated areas of the country this past year. Given that housing is somewhere estimated between 15-18% of our domestic economy[11], we should see a very large ripple over the broader economy as well.

 Next add in the fact that many US companies are now showering their employees with bonuses and pay raises, after the passage of the recent tax overhaul[12]. That means we are likely to finally see some real wage growth in 2018. That will also find additional support from the tightened labor market, vis-à-vis the lowered unemployment rate. Already, November Consumer Spending just jumped .4%, after being flat in October[13]. So it would appear that the consumer (who are somewhere between 60-70% of the economy[14]) is poised to drive the economy higher as well.

 Lastly, I am looking for somewhere between $2 to $2.5 trillion dollars to be repatriated from oversees. I also expect to see many new companies announcing relocation moves from places like Germany and the Eurozone to the US. I also think that combined with the lowered taxes for approximately 90%+ of the population[15] will drive economic growth to in excess of 4% for 2018.

 So what’s the downside or other hurdles we’ll face? Well, the Fed has announced its plan to begin unwinding its $4.5 trillion dollar balance sheet. This will put pressure on long term interest rates, coupled with an expected three rate hikes in 2018. Consequently, home buyers should start this New Year shopping in earnest. The big lid on rates in the last few years has been the fact that the rest of the civilized world’s central banks are quoting negative rates. So investors the world over have flocked to support our bond market in search of yield. We may see that start to change in 2018 as well. The combination of all of this could cause inflation to finally rear its ugly head. Now we’ll just have to wait and see what really happens, but I am optimistic looking ahead!

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