Amid Growth Uncertainty U.S. Economic Outlook for 2018 Looks Gloomy
The world is laughing at U.S. leaders. The alleged Trump-Russia conspiracy has dominated the news since last December. This has distracted Americans from many real and more important problems. One might be that the Trump Pentagon is playing with fire in Syria. More directly for average Americans, the U.S. economic outlook for 2018 is much worse than imagined.
The media has been obsessed with Trump and Russia. Yet, we still have no idea what possible collusion there might have been. The latest twist in the saga is that Trump had a secret meeting with Russian President Vladimir Putin at the G20 Summit in Hamburg. (Source: “Trump, Putin met for nearly an hour in second G20 meeting,” CNN, July 19, 2017.)
This story and its supposed “implications” are sure to last for days. Meanwhile, the negative forces casting a shadow over the 2018 economic outlook aren’t even last-page news.
One of the reasons for the downgrading of U.S. economic forecasts is that the U.S. wastes too much money on wars. Indeed, since independence in 1776, the United States has rarely enjoyed a year without war or military intervention. (Source: “The fatal expense of American imperialism,” The Boston Globe, October 30, 2016.)
That’s good for the defense sector. Indeed, the prospects of defense sector stocks haven’t looked better in years. Just look at how long it’s taking the Republican Party-dominated Congress to repeal Obamacare. You would think they could get that done. They’re just talking about it.
Instead, the defense contractors have received all kinds of boons. Trump has taken care of them by signing tens of billions of arms deals. That’s great for the investors of such companies as Lockheed Martin Corporation (NYSE:LMT) or Raytheon Company (NYSE:RTN)—which happen to be breaking record highs. But, how does it make for robust U.S. economy predictions? No much, it turns out.
The defense companies make money for their investors. But they do so by diverting tax dollars. All Americans pay for defense. They pay even more than they do on education or healthcare. Education is an investment in the future at least; not so defense. Just as I write this, Congress is expected to rubber stamp a $695.0-billion defense budget. Will it make America safer? That’s the $700.0-billion question.
It will make defense executives and investors rich. Perhaps they, instead of the government, can spend the money and fuel the suffering retail and automobile sectors. Hopefully, they will buy American. As for the rest of us, the Defense sector spending means there’s less money available to invest in infrastructure and in the kinds of things that facilitate economic growth.
But the spending on defense is but one of the political missteps that are damaging the average American’s interests. The deep political cleavage that exists in Washington today can’t possibly be good for the United States. Politicians are acting despicably, driving a process that can only result in a U.S. economic collapse in 2017.
There’s a New Kind of Cold War in Washington and It’s Stalling Everything
Veteran journalist Carl Bernstein, famous for breaking President Richard Nixon’s connections to the Watergate episode, noted that there are deep political divisions. The divisions existed with Obama but they exacerbated with Trump. Bernstein knows about a good political scandal and he’s quite fed up with Russiagate. (Source: “Carl Bernstein: ‘Cold civil war’ gripping US as media embrace ‘different truths’,” Washington Examiner, July 16, 2017.)
Bernstein worries that the United States has been taken over by a “cold civil war” that exceeds anything witnessed in the 1970s. If American leadership and American society are in trouble, how could U.S. economic predictions be anything but terrible? An international press campaign to destabilize President Trump continues. But, rather than Trump, the campaign has subverted the U.S. economy.
The U.S. Justice Department and its agents have done their best to get Trump. Instead, all they’ve done is prevent him from launching the reforms that were intended to help the people who voted for him. These voters include many Americans, who would have once voted Democrat without a thought.
The context of the media’s morbid obsession with Trump and the alleged Russian influence hurts the U.S. economic outlook. For example, it would be in America’s economic and political interests to normalize relations with Russia. But to do so, Trump risks running into a thicker wall of opposition in Washington.
Federal Reserve Chair Janet Yellen has changed her mind on the prospect of rising interest rates. Last January, Yellen seemed convinced that inflation was going to move higher as American gross domestic product (GDP) increased. But now, Yellen has changed her mind. She says it would be very difficult to drive U.S. economic growth to three percent, as is the Trump administration’s target.
Asked by a Senate committee about raising growth to three percent within two years, instead of the average two percent achieved annually since the recovery, Yellen hinted that it would be very difficult. Productivity growth of two percent would be necessary to achieve a three-percent increase in the GDP, while productivity gains have fallen to 0.5% in the last five years. (Source: “Fed’s Yellen doesn’t believe Trump’s ‘MAGAnomics’ will be enough to get economic growth to 3%,” CNBC, July 13, 2017.)
Rather, Yellen advised that the government should increase training and investment in research and development to increase productivity. But Congress has failed to bat for the country and there’s no political will to let that happen. Rather, the will seems to be on the side of wrecking any proposal that comes from the White House.
The question is not if the economic supernova will burst, but when. The stock market, while it never accurately captures the “mood” of the real economy, is sure to cause a depression when it crashes. Thus, the combination of political instability verging on civil war in Washington, risks of more wars abroad—with some involving Russia directly—and a stock market that continues to surge as if ruled by a demonic autopilot should have investors trembling.
It Will Be Difficult to Prevent Bearish Scenarios from Unfolding in 2018
Will the U.S. economy collapse in 2018? Will there be a new 2008 or another 1929? Yes, the “chemical” mixture of an out-of-control bullish market (with no substance behind the rallies) and political uncertainty makes for explosive reactions. However, we refer to the dates 2008 or 1929 because we know what happened and understand the scale of the financial and economic destruction that occurred.
The fact is that the next financial crisis could be far worse. That’s why cautious investors should consider the prospects of a U.S. economic collapse in 2018. Yet another domino effect of failures cannot be excluded, Despite the markets’ continued rallies—fueled by Janet Yellen’s hint that the Fed would not raise rates again in 2017—investors are growing nervous. The American financial markets have surpassed any reasonable limits, setting new record highs.
But, sooner rather than later, the only direction left to go is down. Investors will realize they will have pushed stocks to unreasonable price-to-earnings ratios. In other words, investors have been inflating a bubble. The start of the descent—let’s call it a market correction—could start as early as August 2017. That’s when some key players of the NASDAQ, such as Tesla Inc (NASDAQ:TSLA) will report their earnings.
The difference between investors’ expectations and reality will be such that if Tesla fails to meet the highest expectations, it will break the magic tide that’s raised almost all boats on Wall Street. After that, stocks will have no more power to reach higher. They will start sinking. After all, even the “Titanic” was said to be unsinkable…
The market correction might even stabilize for a week or a month, But by 2018, it will be difficult to prevent significant bearish scenarios from unfolding. Consider that Trump’s electoral win in 2016 was supposed to have caused the financial markets to crash. Instead, after some short-lived hesitation, he turned out to be the best possible tonic for stocks.
In other words, the markets rarely perform as we expect. There are many bullish predictions based on the continuation of low interest rates. But there is also a widespread reluctance to face the reality of the many risks ahead. Above all, there is an economic crisis at the base. It has been impoverishing most people, those who used to be part of the now vanishing concept of the “middle class” in favor of multinationals, especially the ones based in Silicon Valley.
In 2000, the “dotcoms” pushed Wall Street ever higher until investors could go no more. Collapse happened. Stock market darlings crashed; the NASDAQ, which reached beyond 5,000 points in March of 2000, has yet to recover, just to give you some perspective. It’s well above 6,000 today, but it took over 15 years to recover. In 2008, the same bubble scenario affected the banks rather than the tech sector. It was the crash of Lehman Brothers Holdings, Inc. that triggered an avalanche and economic recession that was actually a depression.
Meanwhile, six months into Trump’s presidency, his far-flung fiscal stimulus program has not materialized yet. He has proposed it, but Washington is otherwise occupied. It’s stalled everything over the Russiagate allegations. That has raised concerns about which of Trump’s proposals for the economy will actually get through.
The Trump tax plan’s limbo has stalled the inevitable explosion of public debt it will encourage. But, stocks and investors have counted on it. Should it linger any longer, the bubble will burst, flooding Wall Street with investors’ crocodile tears.