Tuesday, January 9, 2018

Confessions of a Two-Handed Economist

President Truman is famous, among other things, for saying he wanted a one-handed economist who would not say “on the one hand this, but on the other hand, that.” In other words, he didn’t always want a complete and balanced analysis – he wanted to know where things were headed. No hemming and hawing!

Truman would have hated me. I love to tell the whole story no matter how much my audience falls asleep.  I am probably a nine-handed economist. So today I am stopping all that. Today, I am one-handed, and today I will tell you what I really think. Today is the day I am part of a panel at Big Arts on Sanibel Island. So I am killing two birds with one stone – writing this blog and using this lunacy as my presentation to the grey-haired audience at Big Arts.

Sanibel Island is an absolutely wonderful place. Thanks to Chuck and Nancy Bonser, who will remain unnamed, we were introduced to this paradise located off the coast of Fort Myers, Florida. We have been going there off and on for the last 30+ years. It not only has wonderful birds to watch, shells to collect, and seafood to eat, Sanibel has a warm and wonderful group of locals who always make us feel incredibly welcome whether we are bellying up to the bar at the “office” (Sanibel Grill) or arguing politics and economics at the Sanibel Café or listening to incredible music at George & Wendy’s Restaurant and the Keylime Bistro.

Thanks to Chuckie B, I have been teaching a course and also participating in panel presentations at a place called Big Arts. I will be teaching again at Big Arts in 2018 but before that class begins, I am part of a panel today! I am supposed to talk about the future of the US economy and think I have 15 minutes to deliver a totally persuasive forecast.

So here goes. My forecast is that the US economy will grow faster in 2018 than it did in 2017. That means a growth rate in the range of 3.5% to 4.5%. All you Never-Trumpers can hang up on me now. You have better things to do than to read or listen to this. I know you were hoping for a feeble growth forecast but I am not a politician, and I am trying to be a one-handed economist today. It’s all about the economy, and as usual, you can take it or leave it.

Below are my bets that underlie this forecast. But first are the risks. Just kidding. I am not going to discuss the risks. I have only one hand today and even though there are trends that argue against me, I am going to ignore them. Take that President Truman!

First is brother Mo. Mo is short for momentum. Most of the time forecasters bet on Mo. It’s like knowing that Uncle Jason always stops at the local grocery store on his way home from work and buys one can of Rainier. He never deviates. But sometimes unexpected factors cause him to alter his pattern. Ashley might want him to stop at the Whole Foods. Whatever. On a given day it makes sense to bet on Jason's Rainier and on the economy pretty much performing like it has for the last few years. Go Mo!

Second is gathering confidence. Each year in which the economy does not fall into a recession and employment rises and inflation seems a little less likely to fall creates a floor of confidence that allows the economy to not only continue growing but to grow even faster. Confident consumers are more willing to buy and firms are more willing to produce.

Third is what is happening in the rest of the world. The US led much of the world out of the last recession and is now ready to step back and let some of the other countries pull the wagon. As many of the hardest hit countries recover and as Europe and Japan strengthen, it creates a global environment of growth to which the US benefits.

Fourth is interest rates. Many people worry that rising interest rates will nip my last three points in the bud. But I doubt that will happen. The interest rates we know and love are not controlled by the Fed. The Fed may plan to raise interest rates but that doesn’t mean that rates will behave. Telling your child that you are going to cut his allowance does not always elicit the desired change in behavior. As in the case of the errant child, interest rates are impacted by many things. While the world is getting stronger, it is still typified by an overcapacity in which supply is greater than demand. Output can expand greatly without the usual cyclical factors that raise prices, price expectations, wages, and interest rates. The data supports this view. Last week I showed a graph that questions if and when a new Fed policy to raise interests will actually lead to that result. It's definitely not a slam dunk.

Fifth is geopolitical. My observation as a kid was that bullies loved to harass kids who would not fight back. Bullies often stay away from kids who will dish out at least a little punishment. The US is saying some tough things to the world’s bullies – I don’t need to name them since it is pretty obvious who these bullies are. Some of you worry that this will lead to war and some really horrible consequences. I don’t. I don’t think our government wants war any more than previous governments did. But our government is doing some things that make us less easy to bully. So I am betting that there will be a lot of noise about US defense and security and very little negative reaction that might put my growth forecast in jeopardy.

Sixth is "da Market". The past changes in stock market indexes cannot be ignored. A lot of wealth has been created. While uncertainty about the future means we won't go on a spending spree, it is hard to ignore those trillions of dollars accumulating in our financial statements. Spending some of those wealth increases will add to the party. Another aspect of rising stock prices is the falling cost of capital. The higher are stock prices the lower is the cost of raising a given amount of capital. With interest rates stalling and stock prices rising, it will be a great time to buy plant and equipment. 

Finally, I like that the pendulum is swinging. Government financial regulation, climate change policy, other EPA rules, and other government regulations on business can move a wee bit away from where they were heading in the past eight years without causing the world to explode. I know some of you want ever more progress on various social policies and government regulation. You have good hearts and smart minds. But I don’t think you know enough about the effects of economic growth on all the things you cherish. I am, therefore, happy to see the pendulum swing back a bit with the hope it will generate growth without harming the future of the US and the planet.

Notice I didn’t say much about tax reform. In my humble opinion it might be eighth in the list of seven I just discussed. It should help economic growth but it is such a hodgepodge of good things and gimmicks, I am not ready to pronounce the tax reform as the greatest thing since sliced bread. No, I am not crazy about its implications for the national debt. 

I stuck my neck out. You are invited to chop away. Hope you have a wonderful 2018!


  1. I still say that you an Brian need to team up. BTW, I understand that Sanibel has the largest seashell collection in the US.

    1. Might be true about Sanibel. I take a beach walk almost every day. Tons of seashells. And birds too. I love it! I am quite proud that you would put me in the same camp as Brian. He is one helluva economist.

  2. You and I are close together except one factor. Wage pull inflation. Since wages have remained flat for 15+ years but product and service have not....there will be some push on wages to get higher to be able to afford the product and service.

    1. That's logical but unfortunately the supply in the labor market works against that. But its a good question. Let's wait and see what happens this year.

  3. Larry,

    I will miss our HYPER conversations while you are away and I liked the article. I appreciate you stinking your neck out with a prediction. However, predictions are like noses, while some are larger and more prominent, everybody has got one. You listed several reasons why the economy and markets should continue to grow and I don't disagree with them. However, I am interested what forces might prevent said growth. It makes me think of an astroid headed toward earth. If you catch it soon enough you only need deviate its path by a very small amount to prevent a collision. What is the possible astroid that is headed toward the US economy?

    1. Mostly Nancy Pelosi. Just kidding. Or maybe not? Yes, I enjoy hper and our conversations but I have to admit that Sanibel Island ain't a bad distraction and I have a lot of people here to argue with! As a card-carrying financial conservative I have to worry about our national debt. It is exploding and no one in DC seems to care. If the rest of the world keeps growing any cracks in the US will be magnified as investors move their money out of the US into the rest of the world. That won't be pleasant. The policy remedies are not that difficult but our present politicians don't want to deal with hard things.