I am now entering my fifth decade in the forecasting business (I started very, very young). One of the things I can assure you from these years of experience is that you truly never know what a year will bring (or a day, for that matter). Nonetheless, I thought it would be good to start 2018 with a few thoughts about some of the things we do know. This year will bring several opportunities to improve the trajectory of the United States economy and improve social systems. There will also be notable challenges, both domestic and international (how am I doing so far?).
Over the next few months, Congress and the President will have to deal with the federal budget and debt ceiling in order to avoid a default. It is exceedingly difficult to reduce spending in an immediate manner, particularly since more than half of the federal budget is comprised of Social Security, Medicare, and Medicaid. A default would be catastrophic to global financial markets and likely usher in a significant recession. The debt ceiling is an artificial limit that has long outlived its usefulness (it started in World War I due to the difficulty of getting Congress together during a recess if borrowing for military outlays became necessary). Increasing the limit does nothing more than authorize paying bills for spending that has already been approved. The consequences of not acting are severe, and, for that very reason, cooler heads should prevail. We will likely have some political theater, but no real harm.
A shutdown occurs when the federal government runs out of budget authority to keep operating, but is much less hazardous that a debt default. It would certainly be disruptive, with fallout ranging from inconveniences to more lasting damage. However, unlike a debt ceiling failure, bills will still be paid and essential functions will still be carried out. Either a real budget deal will be hammered out or we will continue to see short-term fixes to keep things going. Given the current political climate, the latter is more likely. Operating without a budget denies us the right to seriously consider priorities and make fundamental changes for our long-term benefit. It is no way to run a country, but it certainly isn’t unprecedented (we went for years without one during the Obama Administration). If a solid and sustainable budget can be passed, the economy will benefit from increased certainty and, hopefully, a more rational approach going forward. If the real issues are not dealt with now, the problems will only grow more difficult in the future. In any case, look for a lot of fun and games and shenanigans along the shores of the Potomac.
Another opportunity for real change is through comprehensive immigration reform. In addition to issues of fairness and opportunity for those seeking to immigrate to the United States, the US economy needs the workers. Reform which covers the spectrum from visas to a path to citizenship is long overdue. While there is broad-based, bipartisan support for changes to the system, the specifics will be difficult to agree upon. A better system could provide lasting economic benefits, increase efficiency, and resolve many of the challenges for our future workforce.
Another opportunity is to pass an infrastructure bill which gets at big problems. The American Society of Civil Engineers’ Report Card for America’s Infrastructure looks at the condition and performance of infrastructure such as roads, bridges, aviation, drinking water, public transportation, and more. The most recent report came in at a dismal D+, with an estimate of more than $2.0 trillion in additional funds needed to fix the problem (over and above the trillions expected to be spent). An infrastructure bill is expected to be on the table, and improving infrastructure will help maintain US competitiveness (not to mention quality of life).
In addition to these potential policy changes, the coming year will shed additional light on the full implications of the tax bill. I expect that it will generate an ongoing stimulus, the size of which depends in part on corporate responses. It will increase the federal deficit, but not at an unsustainable level. To make a measurable dent in our growing national debt will require bipartisan legislation with a long-term focus (I wouldn’t count on that). I expect that the Federal Reserve will continue to normalize monetary policy and its balance sheet, which will tend to have a dampening effect on economic growth (but one I think the economy will be able to weather without too much trouble).
This year will bring challenges to the Organization of the Petroleum Exporting Countries (OPEC). Production cuts to shore up oil prices were extended into 2018, but the issue will almost certainly be revisited at OPEC meetings this summer. It would not be surprising to see additional volatility in the oil market as OPEC and other major producing nations such as Russia try to work together. Situations in Venezuela and Iran could also cause production shifts and associated price movement. Rising US production represents yet another wrinkle. On balance, I think that oil prices will likely continue to trend upward in response to general supply and demand conditions, but volatility may well increase.
The US economy’s strength will help as we deal with what comes. There are also opportunities for notable forward progress. The beginning of a new year is a time when many of us look to the future and set goals or make resolutions. If the folks in Washington would show some resolve and actually deal with major issues in a meaningful way, Americans for generations to come would benefit from greater prosperity and a more sustainable government. Although that is unlikely, I do think that 2018 will be a solid year for the economy. On that positive note, I will end and say “Happy New Year!”