August economy 1

It is hard to believe that we are at the end of summer. Schools already are – or will soon be – back in session. Pools will be closing and the tart chill of autumn will soon tease us.

The summer has been both interesting and tiresome. The excessive heat in St. Louis through most of July took its toll both on vegetation and the mental health of St. Louisans. The unproductive arguing in Washington reached a new high and has led to Congress receiving an approval rating below 15%. It has also resulted in no healthcare reform, no tax reform, and a failure to address any significant problem at a national level.

Trump has been Trump. After replacing his communications staff and his chief of staff, observers were hopeful that his volatile comments and tweets would be controlled. However, the fact is that he made provocative statements last week regarding North Korea that helped take the stock market down by about 2%. This suggest that the cure hasn’t taken.

With this background, it is time to check where we are and then update my predictions for 2017.

  • Until the last two weeks, the stock market has continued to rise making new highs as recently as last Tuesday. The reasons for new highs are less about value in the stock market and more about the lack of alternatives. I coined the term the “no alternatives market” a few years ago and this designation again seems appropriate. Without the impact of the madness with North Korea, it is likely the no alternatives market would continue moving up until some other shock happened.
  • Bond prices have been up due to slower than expected economic growth. With rising bond prices – both before and since the Korean crisis – long term interest rates are at their lows for the year. This is due primarily to lower than expected economic growth.
  • I expected GDP to grow at 3% or more this year in part due to the change in attitude among business owners that Trump’s election triggered. I still see evidence of a more positive attitude among business owners. In addition, the employment numbers continue to increase. And, profits from large corporations continue to climb. But GDP growth for the year remains under a 2% annual rate.
    • It should be noted that year-on-year growth in the numbers for the second quarter were reported at 2.6%, highest since third quarter 2016. However, recent history suggests that the initial number will be revised downward on the next data release.
  • Assuming the Korean threat is resolved – and without the impact of another global shock such as a cyber-terrorist event – I would expect the economy to improve slightly for the rest of the year but fall short of the 3-4% growth that I expected for 2017.

Two big issues are and will dominate the news for the next few months. First, the irrational actions of the Korean dictator. Second, the failure of Congress to pass Trump’s tax reform and Obamacare reform.

The lack of widespread panic in the markets, and especially the small increase in the gold market and the volatility indexes, indicates that the big money investors believe that we will avoid the launch of a nuclear missile by North Korea.

The second issue is the absolute failure of the Republican-controlled Congress to pass any significant legislation. The Republicans are squandering the rare opportunity where one political party controls both houses of Congress and the Presidency.

The problem is that the Republican party is made up of at least three political factions that cannot put aside their selfish agendas to pass legislation that improves this country. Instead of agreeing on legislation that represents a compromise of moderate, conservative, and radically conservative agendas, they continue to argue among themselves and nothing gets done. As a result, the tragedy of Obamacare continues and stupid tax policies that nearly everyone agrees should be changed stay in place.

My sense is that we will muddle through the rest of the year and avoid a nuclear incident as well as any other significant cyber terror event. Unfortunately, I also fear that Congress will not do anything meaningful.

The question then is, at what point do the markets abandon the optimism that has moved them up since the election of Trump? Will the economy start to slow down again because the fundamentals have not changed despite Trump’s promises? If so, the stock market, at best, will stagnate, and interest rates will continue to be low and possibly move lower.

In closing, one of the economic surprises this year for me has been the decline of the dollar. Given the view from Trump that the US would be stronger and more competitive, I expected the dollar to increase in value this year. However, it has declined about 11% since January.

Does this meant that the rest of the world knows that the US is incapable of getting its economic house in order? Is it a result of foreigners understanding better than us the long-term ineffectiveness of modern governments? Perhaps we are more like Europe than we think we are. And if we are, weak economic growth will be here for a long time.