Wednesday, November 1, 2017

Increased Growth Ahead, But Watch for Bubbles!

Financial FAQs

Maybe it’s the natural disasters plaguing U.S. Or the fact businesses haven’t been investing in future growth until now. But the times they are a’changing, as GDP grew 3 percent in Q3 for the second quarter in a row.

It’s mainly due to higher consumer spending and higher inventories as businesses see better times ahead. The higher capital investments have boosted manufacturing, and exports have also increased.

Graph: Econoday

What to make of all this in the eighth year of this recovery, and full employment? More automation, for one thing, as businesses have to depend more on robotics and other aids to productivity with the dearth of new workers entering the labor market. Jobs and income are the keys to October's report, says Econoday.
“ The assessment of October's jobs market is unusually favorable with only 17.5 percent of the sample saying jobs are hard to get, which is very low and down 1/2 percentage point from September.”
Graph: Econoday

Consumer confidence is also soaring, with the Conference Board’s index jumping 5.3 points in the headline index to 125.9 which is a 17-year high. Of course that was just before the dot-com bubble burst in 2000, so is it a sign of irrational exuberance?

Nobel economist Robert Shiller—first to coin the term “irrational exuberance”—has lately been warning of a stock bubble.
“…the US stock market today looks a lot like it did at the peaks before most of the country’s 13 previous bear markets,” said Shiller in a recent Project Syndicate column. “This is not to say that a bear market is guaranteed: such episodes are difficult to anticipate, and the next one may still be a long way off. And even if a bear market does arrive, for anyone who does not buy at the market’s peak and sell at the trough, losses tend to be less than 20 percent.“
The Fed is also expected to raise short term rates another one-quarter percent in their December FOMC meeting, and it looks like President Trump is about to appoint another Fed Governor, Jerome Powell, as the next Fed Chairman to take over February 1, when Janet Yellen’s term is over.

The ‘take’ on Powell is that he is well-qualified and likes fewer regulations, which Trump will like.
He also wants to reduce outstanding Federal Reserve holdings of securities more substantially, and according to former Fed Chair Ben Bernanke did not like so much Quantitative Easing that kept interest rates so low for so long. That puts him in the budget deficit hawk camp.

But what really can be done about reducing the budget deficit with the current one-party tax reform debate? Republicans are attempting once again to get around the Democrats and a bipartisan tax bill, as they did with the attempted repeal of Obamacare.

That didn’t work, so why do they believe it will work this time, especially when some cherished tax breaks would have to be eliminated to cover the approximately $1.5 trillion in tax breaks; that might include reducing 401(k) retirement savings’ accounts and eliminating $1.5 trillion in Medicaid and Medicare spending over the next decade?

Stay tuned, but the U.S. can’t function with a one-party system.

Harlan Green © 2017

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