The Best of Times or The Worst of Times?January 05, 17
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only."
The famous first paragraph of the Charles Dickens novel A Tale of Two Cities comes to mind when reading articles about the state of the US economy. Where one analyst predicts doom and gloom, another suggests that there's no problem. Quite the opposite, the economy did well in 2016 and will continue on the same path in 2017.
In some respects, the U.S. economy is doing well, at least if you measure it according to what the stock markets are doing. They had a record-breaking 2016 and are continuing to power ahead.
Will the policies of President-Elect Trump have a positive impact? On the one hand, economists point to his likely desire to institute tax cuts, approve huge infrastructure spending and reduce regulation. On the other hand, that might spark a resurgence of inflation thus forcing the Federal Reserve to raise interest rates. That could have a negative impact on a country that has become used to living on historically low interest rates for the past eight years. Could raising rates put homebuyers under pressure and spark a new round of foreclosures or make loans too expensive for businesses and lead them to axe staff?
Meanwhile, some analysts believe the emphasis on what President Trump will or won't do is not so crucial. According to this theory, the U.S. economy doesn't care which person or party is in power. The economy rises and sinks depending on decisions made by millions of people, not one person. The US economy is a supertanker and ships of that size need a long time and distance to change direction.
Other factors may be more pertinent: what will happen to energy prices, and what about the deep-seated demographic changes taking place in American society, for example. Will the labor force participation rate rise and the labor market tighten enough to enable workers to demand higher wages to put more disposable income in their pockets?
A happy new year to all, and may it bring us the best of times.