Optimism abounds across the globe. World economies are finally benefiting from years of easy monetary policy. Tax cuts and spending increases in the U.S. will amplify the already very ample and self-reinforcing momentum which is driving synchronous global growth well above long-term potential levels. Slack has already disappeared or is disappearing rapidly in many economies. The U.S. economy will overheat in coming months. Bill Longbrake counsels in this month’s letter, that one should enjoy the good times now because we know from history that strong economic momentum, when the economy is operating at or above full capacity, eventually leads to recession and correction of the imbalances that build up during the euphoric period of strong growth. Bill Discusses 16 risks facing the U.S. and global economies. He also explains and assesses significant 2018 forecasts.
This month’s letter is in two parts. In Part I, Bill Longbrake provides his final assessment of “hits” and “misses” on his 2017 forecasts. There were a lot of misses, which is a reminder that domestic and international economic and political dynamics can and usually do change dramatically over the course of a single year. Nonetheless, Bill takes a crack in the second section of Part I to summarize expectations for economic activity in 2018, which promises to be a very good year.
However, given that forecasts grow stale quickly and that the course of events can change economic outcomes, sometimes substantially, in Part II Bill provides a 10-year outlook for several key economic variable for four different scenarios. The “BASE” scenario reflects steady growth, but incorporates the demographic impact of slowing employment. Outcomes in other scenarios are not forecasts but rather show what could happen should the economy overheat, should recession occur, or should productivity remain extremely weak.
In next month’s letter, Bill intends to discuss accumulating economic imbalances and to examine significant risks that could alter the U.S. and international outlooks for the worse, if not in 2018, in the not too distant future.
As we enter 2018, consumer and business optimism is at levels not experienced since the dot com days of the late 1990s. Passage of “The Tax Cuts and Jobs Act” by Congress and signed by President Trump just before Christmas has reinforced animal spirits. 2018 should be a good year, perhaps a very good year. But, with the economy operating at full capacity and the labor market extremely tight, Bill Longbrake warns that the extra stimulus risks overheating the economy and exacerbating imbalances that have already been building. In this month’s letter, Longbrake examines the natural rate of unemployment and demonstrates that small differences in its level have significant implications for inflation and monetary policy. He also provides updates on economic activity, employment, inflation and interest rates. Read the full letter.
As prospects rise for significant tax reform legislation to be enacted and take effect at the beginning of 2018, this stimulus boost is likely to extend the current expansion and push off the timing of the next recession. But, because the stimulus is coming during the mature phase of the cycle when the economy is already at full employment, it raises the risks of overheating and a potentially tighter monetary policy down the road. Amplifying the business cycle at this point in time is not optimal economic policy. But it is politically necessary for Republicans to deliver at least part of what they have promised to the American public. Bill Longbrake discusses prospects and risks in this month’s letter. He also describes significant policy developments coming out of the 19th Communist Party Congress that will shape China’s social and economic systems for years to come.
The Center for Financial Policy was honored to host FDIC Chairman Martin Gruenberg on November 3, 2017 in College Park for a talk to faculty and students on the financial crisis and its aftermath.
“I thought the ‘Thrift Crisis’ (1980-90 Savings and Loan Crisis) would be the most severe crisis I would encounter. It resulted in the failure of nearly a third of its industry and cost taxpayers nearly $140 billion to make good on the failed institutions,” he said. “But as it turned out it was a relatively a small hors d’oeuvre compared to what we went through in 2008 and 2009.” — Chairman Martin Gruenberg
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