Economics: 2018 looks strong; possible bend in the road for 2019

January 25, 2018

January 22/29, 2018: Volume 33, Issue 16

 

 

One of the highlights of the annual North American Floor Covering Distributors convention is the economic overview from ITR Economics, one of the most accurate forecasters in the country. This time around it was Brian Beaulieu, one of the company’s two principals along with his twin brother, Alan, who gave an upbeat forecast for the next 10 years.

What follows is a synopsis of the 90-minute presentation in Beaulieu’s words…

The future looks good as the economy continues to grow. We still see softness in 2019 that you can manage through. We see the first three quarters of 2019 being flat and then the economy begins to rise in earnest in the fourth quarter and into 2020 and 2021. We are not anticipating any significant recession in the next four or five years.

Given that we see a lot of growth in our future, given that interest rates are still so cheap, given that we have a labor shortage to contend with, you should take advantage and invest in your businesses today. The No. 1 problem we will face for the next 13 years is a labor shortage. Attracting and keeping talented people will be the bane of our existence. Invest in technology and equipment that will alleviate your need for labor. This is a global phenomenon.

Politics
Republicans believe the economy does better when a Republican is in the Oval Office. Democrats want to believe the economy does better when a Democrat is in the Oval Office. Warren Buffet said, “Red or blue, I can still make green.” Stop worrying about who is in the Oval Office. What you do every day in your office matters far more than what they are doing in Washington.

Tax cuts
If you think the tax changes is something that will knock the socks off the economy, we don’t see it that way. Go about your business with the hand you’ve been dealt. Stop relying on a tax break to make things better. If you think deregulation has helped you, more power to you but that can be changed with the next president. Stay focused on the business of your business.

Stock market
The stock market is going up because corporate profitability is on the rise. However, it is relatively expensive. If you put fresh money into this stock market now your average rate of return for the next five years will be between 1% and 2%. The best thing to happen would be to see the market pull back. A 10%-15% correction would be beautiful. You can’t time this market in terms of the lows and the highs, but you can decide when to put in fresh money. Be patient. Now is not the time.

Trade
Contrary to popular belief, trade is important to the U.S. And if you throw trade barriers to stop imports you will also end up hurting exports. Sixty percent of our exports are manufactured items. Manufacturers will feel this pain more deeply. We are still one of the world’s pre-eminent manufacturers, but we also are in need of being able to sell our wares abroad.

Global picture
The world’s total GDP is $65.278 trillion; the U.S. comprises 24.7% of world’s economy. China is 14.9%. How long will the U.S. remain No. 1? When will China overtake us? The reality from an economic perspective is the U.S. will be No. 1 for the next 100 years. Why? Three factors:

  1. Demographics. A growing population ensures organic economic growth. We have a growing population in the U.S.; China does not. Every 13 seconds the U.S. net population (birth + immigration – death) increases by 1. India is another country that has a positive demographic trend.
  2. Natural resources. You have to own your natural resources if you will thrive during a period of inflation like we are moving into. The U.S. is blessed with natural resources; China has a relative paucity of natural resources. You have to get to India before you find another country strong in natural resources. Brazil, Canada and Mexico are strong but have negative demographics.
  3. Rule of law. History shows private property rights is essential to long-term growth. Also, intellectual property; if you are going to be an innovative, creative society and economy, you have to have the intellectual property. And bankruptcy law; you have to be able to fail forward. You have to be able to come out from underneath, make mistakes and try again.

The only country that wins on all three of those scores is the USA.

Housing
This is a tale of two stories—single unit and multi-family. Single unit starts is a rising trend that will generally last until 2029-2030. It is not a continuous rise and will stall from time to time, but it won’t be like the Great Recession.

Buy urban because people are going urban. That’s where baby boomers want to live. And at least 40% of millennials now say they want to go there. It’s the one place where the supply will be less than the demand going forward. People also want to live near water. So buy in an urban area, high up where you can see water or be on the water. That’s the trifecta. There are 100 million more Americans coming at us between now and 2050. They all are going to want someplace to live. You may as well own that place.

You want to sell most of your real estate off in 2029-2030. We think that next decade will be one of deflation, and you don’t want to be stuck holding that property.

Multi-unit starts is a different story. Don’t expect anything good during the first half of 2018. Be careful about this segment of the market. Rent growth is 2%, barely keeping up with inflation.

Home prices are going up. That trend will largely continue until 2029-2030. The only thing that can upset this trend is if they repeal Dodd-Frank. That would stop home prices from growing. This would be good for the economy and a blessing for the financial industry but disruptive to this trend.

Bond market
The bond market is bigger than the stock market. This market looks forward 18-24 months. Much more dollars are involved globally. The bond market looked at the election, looked at Trump’s promises and decided interest rates needed to go higher. If you are going to exacerbate the labor shortage by restricting immigration, then labor cost will go even higher. If you are going to cut taxes without cutting spending, the national debt will go up. International debt, inflation and the bond yield goes up. It was the same thing when Ronald Reagan was elected president in 1980.

Certain forces back then gave us a declining trend. Globalization gave us deflation and declining interest rates. What’s the worldwide trend today? Protectionism. Trump is anti-globalization. That coupled with the propensity for inflation means interest rates are likely to go up. So the only rational thing to do is to borrow as much money as you possibly can to invest in your businesses, or buy wealth-creating assets. How much should you borrow? If you are sleeping through the night you have not borrowed enough money. Unless you are three to seven years away from retirement.

Credit
We are on a long, rising trend. Seventy years of history says debt does not take down the economy. The economy actually grows with consumer credit. It’s not about what the debt is, it’s how we are handling that debt. Don’t be afraid to extend credit terms to other businesses. Do your normal due diligence, but one of the ways you can increase market share and attract more business is through your credit offerings. This is a safe environment to do that.

Retail business
Sales are growing at a good, 3.8% clip. That is strong enough to ensure the economy will continue to grow through 2018. When retail sales drop below a 2%-2.5% growth rate, that’s when you start worrying about the economy. There is no need to worry.

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