Politics Will Clash With Economics in 2018– by Jerry Jasinowski
As we embark upon the New Year, the economy is growing, we’re adding jobs and the stock market continues to hit record highs. At the same time, President Trump and other politicians continue to say things that do not bode well for long-term economic growth.
First, the economy is on a roll expanding at a 3 percent rate in the last couple of quarters. Corporate profits are up. I anticipate that the first quarter of 2018 will initially show a continued stock rally on the back of good holiday sales and tax sensitive U.S. sectors such as technology, retail, industrials, and materials.
But here’s the rub – the President will muddy the waters by continuing to applaud protectionist measures, like doing away with NAFTA, proposing a huge infrastructure package that can’t be paid for, and otherwise doing little that would enhance long-term growth prospects. Nothing has been proposed to enhance human capital or deal with the economic plight of the middle class. The healthcare system has been thrown into a state of chaos by the tax bill. The recently passed tax bill further compounds these problems by tilting toward the upper income class and increasing the budget deficit by $1.5 trillion over 10 years.
Second, you can expect seeds of economic doubt to creep into the economic environment in the second quarter as U.S. macro indicators begin to weaken, especially the job figures. Part of this will be due to the President’s destabilizing tweets attacking the FBI, the U.S. intelligence community, and our friends and foes around the world. The increasingly juvenile nature of the tweets has caused many to question President Trump’s emotional stability. This does not help the economy.
But economic anxiety will also be due to the fact that interest rates will be rising as a result of the excessive deficit stimulation the current administration is creating with the tax bill, as well as the fact that the Federal Reserve is now in a monetary tightening mode. Clearly, rising interest rates will slow economic growth.
Third, the fallout associated with the Mueller investigation will continue as new allegations and charges come to light. I expect additional individuals to be charged. I also expect the Mueller investigation will begin to uncover financial dealings that are highly problematic for the President and his family. All of this raises the real prospect that the President could fire Mueller, which will provoke a constitutional crisis and seriously damage confidence about the economy and the stock market. The Republican majority in the Senate is now razor thin. Don’t expect a robust Republican agenda to be enacted this year. The lack of congressional action will cause a major decline in the dollar and the price of gold could increase significantly.
Fourth, while it’s impossible to predict the 2018 election results, the above instability will certainly put a lot of electoral pressure on the Republicans and it’s possible the House could go Democratic. If you look at the Alabama and Virginia races, it is clear the Democrats won because they had much more aggressive grassroots operations based on resistance to Trumpian policy and their voters’ passionate concerns about the President’s fitness for office. You can expect this passion to continue to grow and motivate voter grassroots efforts.
Finally, while I think it’s unlikely we’ll see a recession or a huge stock market crash in 2018, primarily because there’s too much liquidity floating around the globe, one shouldn’t expect more than single digit equity gains. And there is no reason to expect any major economic reforms that will strengthen U.S. productivity and growth.
Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements. January 2018