The US Economy Could Turn Around in 2017—Or Crash

By: John_Mauldin

Markets have rallied since November on the expectation that Trump and the Republicans will quickly enact a growth-oriented economic agenda—including tax cuts, regulatory relief, and targeted economic stimulus projects.

As I talk to people involved in the transition, I am gaining more confidence that a good part of that agenda will actually be realized. It’s clear to me that the right people want it to happen, at least.

Whether they will get what they want is a slightly different question.

Republican reform efforts could improve the economy if done right

The reform effort could fall apart for various reasons. The Senate majority is narrow enough that just a handful of GOP defectors will be able to stop any given bill, assuming Democrats stay united in opposition.

I think Republicans should be on guard against hubris, as well. The decision last week to kick off the year by softening ethics rules was a terrible idea. They accomplished nothing and energized an opposition that was otherwise on its heels.

There is always the chance that some “bolt from the blue” could change everything.

An international crisis, a large bank failure, terror attacks—any one of a long list of unforeseeable events could conceivably derail this train.

Assuming no major surprises, I think the tax and regulation changes can boost GDP growth in the final half of 2017 toward the 2.5 percent range. That will be a small improvement from this year and could set the table for a bigger feast in 2018 and beyond.

Much also depends on how the Federal Reserve responds, as well as on any changes in its composition.

But here again, if the Republicans get all timid or can’t cooperate and end up settling for the usual tinkering around the edges with tax reform and healthcare reform; and if they are stymied by an entrenched bureaucracy that doesn’t want to see its regulatory powers dismembered, then we can’t expect to get the economic boost that everybody is anticipating.

Or the market could crash

If my base case plays out and we get reasonable progress on healthcare reform along with regulatory reforms, the stock market could end the year higher, even from today’s elevated valuations. Also, earnings could really be improving by the third and fourth quarters, that is if the reforms are actually put into place in time.

If the reforms get hung up or are watered down and not really effective, this market could tumble out of bed so fast that it will make your head spin.

That said, passive management will also continue to work if my base-case scenario comes about, and that outcome will just convince more people to move their portfolios to passive management.

The more people that are lured into the grip of passive investing, the greater the pain will ultimately be—which means that this market can go sideways for a lot longer than many of us who have a cautious nature can imagine.

Manufacturing jobs hang in the balance

The US is manufacturing more materials and goods than ever. Manufacturing is increasing at a fairly serious rate, well over 2% a year. The problem is manufacturing jobs are not.

The real challenge the US and the rest of the developed world face is how to create new jobs in the face of this automation challenge. The problem is not one we can walk away from.

If we don’t automate faster, we lose jobs by being uncompetitive. If we do automate, then we see jobs go away. What we have to do is figure out how to make sure that new jobs are created, and that these jobs are simply not make-work but are rather meaningful and fulfilling.

If Trump succeeds at boosting US jobs, the problem may just be offloaded elsewhere—for example, Mexico or other places where US companies once operated. We need solutions that bring in the tide and lift all boats at once.

We need to rethink the economy so that everyone benefits

At some point this year, we will be talking about why the whole theoretical construct that nearly all economics is founded upon—that of a dynamic equilibrium—is a false premise.

The base case for the economy is not equilibrium, no matter how you define it, but rather constant change and near chaos.

Part of the reason that dynamic equilibrium models work so well in theory is that we actually have the mathematics to create them. The fact that these models are perpetually wrong should give us a clue that something else is going on for which we don’t have the math or even sufficient fundamental insight.

It is my hope that 2017 will be the year when we start to recognize our true potential for abundance and begin adapting to it in a way that everyone benefits.

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