30 Dec 2016 A New Year of Worries or Opportunities?
As we bid adios to 2016 and anticipate 2017, many of the ‘givens’ from years past have vanished. The healthcare industry will almost certainly undergo another sea-change, like it did in 2010 with Obama Care. Taxes are apt to fall significantly with both a White House and Congress on parallel courses to cut virtually all tax rates, corporate and personal. International trade is headed for a shakeup as Mr. Trump promises to end or re-negotiate all major agreements on the table and in force that in his view unfairly penalize American interests. Major federally-funded construction projects will renovate highways, bridges, dams, waterways, and airports, but which ones and at what cost to the debt? Immigration laws will be strenuously enforced, impacting families, sanctuary cities, farms, and high tech companies dependent on lower cost visa workers. And foreign policy? If there ever was a case of ‘out of the frying pan and into the fire,’ we are there. The world is a mess and likely to to get messier, unless and until American diplomacy, backed by credibility and power, is reestablished.
One thing is certain – without a strong and sustainable economy, few of our hopes and dreams as a country are attainable and our future looks more like Greece than the America we grew up in.
Regulations and high taxes have been a drag on economic growth for the past decade or more, but perhaps the most enduring and significant detractor has been the loss of our manufacturing sector and the middle-class jobs it provides. In 2013 the US manufacturing sector had shrunk to less than 20%, while the service sector had grown to nearly 80%. In 1945 the numbers were practically the opposite.
A large core of Mr. Trump’s support comes from men and women who have seen their livelihoods diminished as they were forced to take low-skilled, low-paying service jobs when factories closed down. Diminished incomes means less spending on goods and services. As a consumer-driven economy (consumer spending makes up 75% of our economy), any slowing in spending or consumption produces a negative multiplier effect on our economy. Manufacturing economies are more resilient and stronger than service economies.
The challenges of returning the American economy to a powerful manufacturing base are huge, but ignoring the losses would be ruinous. Middle class workers know it, the Chinese know it, and I suspect most elite economists know it, but are afraid to admit they were wrong. Manufacturing is the foundation of strong economies. It is how the US won WWII and how China became a global force almost overnight.
The stock and bond markets convey a collective belief that the US economy will grow faster next year than in past years. Mr. Trump’s promised policies and those of the GOP Congressional leadership are adequately aligned that fundamental changes to taxes and regulations, will be fast, significant and hugely supportive of economic growth.
Promised billions in federal spending to rebuild infrastructure will create low-skilled to mid-skilled jobs. The re-repatriation of some $2.5 trillion in corporate reserves held around the world could stimulate huge investment in plant and equipment to offer mid- to high-skilled jobs building iPhones, microprocessors, solar panels, 3-D printers, super-low-energy refrigerators, jet engines, and on and on.
Bond investors are suggesting a rise in inflation as the economy is poised to heat up. This effect is not necessarily a given. If productivity (the rate of output per unit of input) rises as fast or faster than demand for the goods produced, wages and prices will not increase. In fact wage pressures are likely not going to be a problem for some time as there remains a huge supply of workers on the sidelines, off the government unemployed radar. They could conceivably come pouring back into the workforce if interesting, skilled jobs return within their reach.
It is hard to imagine what the impacts will be of the coming tectonic shifts in business, social, and legal assumptions that have driven decisions these past 10-15 years or so. Mr. Trump seems intent on shaking, even eliminating every norm, treaty, law, program, bureau, or organization (including the UN) that has proven ineffective in promoting US economic growth and security.
The strength of the US from the very beginning, has been found in the creativity, innovation and productivity of its people. We won a war of independence against the greatest naval and standing army the world, we survived a bloody civil war, a Great Depression, two world wars, and multiple smaller wars. In each case we not only survived, we went on to thrive because of the unique combination of natural and human attributes we enjoy in the country of America and as Americans.
Planning generally operates from one of two possible outlooks on the future – pessimism or optimism. Uncertainty colors both, but opportunities are discovered only within hopeful plans. Plans driven by pessimism generate their own supply of worries and today’s news only reinforces them. But if just some degree of the changes Mr. Trump and the new Congress propose to free small and large businesses in this country to invest, innovate, create, and produce, we might just see this largest economy in the world get back to the 3%, 4%, 5%, or even higher levels of growth, that it is eminently capable of – the kind of growth that used to bring rest of the world along, both in prosperity and peace.
Remember when the Berlin Wall fell in 1989? Communist Russia fell to our economy more than to our military. The arms race simply bankrupted them while ours thrived. Following that dramatic event, dictators around the world behaved themselves unusually well. Strong economies brought a peace that was sustainable, not military victories.
We are in for a ride in 2017, there’s no question of that. But the choice is ours to seek its opportunities or to hide from its worries.
Happy New Year from all of us at Beacon