The Economic Road Past & Future
Some of you haven't know me long and others understandably don't read every article/post I write. So I thought it necessary to review where we came from and where we are going (at least where I think) economically. Back in 2016, I grew weary of the economic expansion tied to the signal of our Federal Reserve that it was beginning a cycle of monetary policy reversal ie Quantitative Loosening (falling rates & printing trillions in money) to Quantitative Tightening (rising rates & printing less money). The theory about the economy was what little growth existed was a result of artificially low rates and trillions of dollars sloshing around in the financial system thanks to the Fed & other central banks around the world literally printing money out of nothing. Then came the Presidential elections which ushered in tax reform in 2017 which I believed would accelerate the economy near-term and believed most economists didn't factor in the cost. That when growth accelerated so would inflation and wages and result in even faster Quantitative Tightening which in turn would offset some of that growth. I dubbed this "Growth Doesn't Come Free". The US administration targeted accelerating wages as a primary goal of the tax cuts which is the exact metric the Fed uses to target inflation. Well here we are in 2018 when GDP peaked at over 4% in 2Q and probably something less than that in 3Q. Both housing and autos tied to higher interest rates began slowing in 2017 and accelerated slowing through out 2018 especially most recently. We outlined this in 2017 & 2018 as the cost associated with the tax cuts that many dismissed. Just recently we discussed that the tariffs and the natural progression of growth & rising rates have finally filtered into corporate earnings pressuring margins finally after rising to record levels. This as occurred as other world economies faltered both in China and in Europe as monetary policy failed to spur growth there sustainably.
So that's the past so what about the future? Well I believe the US economy has likely seen its "Tipping Point" or peak growth and any further Quantitative Tightening would have a material negative impact on growth. Thus, why we believe growth going into 2019 will likely dramatically slow, but still exist. Nothing like 2008/09, but slower growth for awhile. Could there be a recession? Yes but that will highly depend on the central banks who I don't know nor can I read their minds. If they signal a pause in tightening soon then growth will stabilize if they don't and raise rates 3 more times or more into 2019 then all bets are off. I don't have a crystal ball, but I suspect at some point soon probably in early 2019 it will be abundantly clear that growth has materially slowed and the trajectory in tightening will change thus stabilizing things. Labor markets are already tight, but wage inflation is rising but not all that fast which will probably handcuff central banks on returning to loosening. Wild card is the trade dispute if resolved will likely prove a growth booster especially for the US. That is why we believe we will have a sustained period of low growth once again.
Tying this all to advice to business owners is that there is time to take risk and there is time not to. This is one of times to reduce risk and to prepare for lower demand before it occurs. Here at CCS we use ECONOMIC perspectives with FINANCE & ACCOUNTING specifics of a business to optimize profits and better plan both for business & personally. In order to run a business efficiently you must first define the economic environment it operates because each will determine how much risk you take and required returns for that risk when allocating a business resources (MONEY, TIME, CAPITAL, ASSETS, LABOR, MARKETING). It is these resources we help to efficiently deploy to increase profits of clients we work with. Much of this has been simplified for your consumption so please contact us to discuss in more detail at THEPROFITCONSULTANT.ME.