As 2017 winds down and 2018 is coming into sight we are receiving more and more questions about our outlook for the new year. While we rarely make predictions about where the markets will be at any point in time, we do want to share a few thoughts on our general outlook for the economy going forward.
While the US has been in an economic recovery for more than 8 straight years, the recovery has yet to reach its full potential. In 2017 we started to see the economy accelerate in growth from the 2.5% GDP number that we have been seeing into the 3% range.
We believe that we will continue to see this trend in 2018 largely lead by improvements in 4 key economic fundamental indicators. Below is a list of these economic pillars that we keep a watchful eye on when making decisions on the direction of our client’s investments. When looking at these 4 pillars we believe that we have a lot to be thankful for and feel that we will continue to see economic growth and prosperity in the new year as these pillars continue to strengthen.
- Monetary Policy is not tight – The Federal Reserve has been in the news recently for their final move of 2017 by raise short term interest rates to a range of 1.25% – 1.5%. Many fear that the Fed is tightening the money supply too fast, but we are not in this camp. We believe that a short-term interest rate of 1.5% is still well below a healthy short-term rate and that the Fed still has plenty of room to raise rates in 2018. A normalization of rates will continue to send signals to the market that the Fed believes the economy is on a positive track. Positive
- Trade Policy is not changing, much – Protectionist policies have been discussed for much of 2016 and 2017. After his inauguration, the President issued an executive order that removed the US from the Trans-Pacific Partnership that was signed in February of 2016. Because the agreement was so new we don’t believe that it had much effect on US trade and don’t believe that the withdraw will have much negative impact on future trade. The US is still part of NAFTA and with other policy initiatives ahead of it, it appears to be secure for now. The World Trade Organization has estimated growth in global trade for 2017 will increase from 2016 by 4.2%. This is double the growth we saw from 2015 to 2016. Positive
- Tax Policy is putting money back in the private sector– On December 22 the President signed into law the largest tax reform bill in decades. While there will always be discussion about rich and poor and who is or is not paying their “fair share”, one thing that we do believe is that dollars are more effectively and efficiently allocated by individuals than by any government. We believe that while this tax policy is not perfect it is a step in the direction of putting money back into the hands of the people and that it will in turn spur economic growth. One concern is that it may increase the deficit over the next 10 years. Positive
- Regulation growth is slowing – Regulation growth in 2017 has slowed considerably. Ending in 2016 we were on pace to add 800,000 new pages of regulation in this decade. That would be an increase in new regulation created of over 60% since the 1980’s. While regulation is often a positive on the surface we do not always consider the cost of enacting these policies, such as lost economic growth. When government creates regulations that complicate a process or make rules unclear for individuals and business, activity slows. This has an economic cost that is unseen. With the slowdown of new regulation in 2017 and we would expect in 2018, we are already starting to see capital spending by business pick up. Positive
With all of this in mind we feel like we are on strong footing going into 2018. The 4th quarter GDP number has not officially been announced but when it is we fully expect that is will be at 3%+. Once it is in the books this will be the first time since 2004 that we have had three consecutive quarters of 3%+ GDP growth in a row. We expect that with the most recent pick up in the movement in money that will see this trend continue into 2018.
Cheers to a healthy and prosperous 2018!
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