New Year Brings Economic Optimism And Uncertainty

While most of us are gathering with family and friends this week for Christmas and Hanukkah celebrations, the adults watching kids open presents will likely have at least one eye on what’s ahead.  The holidays aren’t cheap.  The cost of almost everything continues to rise.  Bills for the holiday celebration will soon come due.

Many of us like to set these realities and worries aside for a brief moment.  Hopefully we’re at a place where we can at least enjoy these special times.  The future – with its expenses and uncertainties – is always with us.

Whether we’re looking to begin the year with economic optimism or pessimism has a lot to do with how we may have voted in November.  Several polls on the subject indicate Republicans believe better economic days are ahead, whereas Democrats have much stronger doubts.  

That isn’t really that unusual.  Many of us tend to vote with our pocketbooks. Those on the winning side were voting for what they thought would be prosperity.  Those who didn’t win often believe things will get worse.

Economics merely is a label for expectations in action.  Sometimes sentiment alone can become a self-fulfilling prophecy.  People optimistic about the future tend to spend and invest more.  The vast majority of our economy as measured by the GDP is consumer spending.  New investment makes up a respectable share too.

There are real concerns that we’ll have to navigate into the new year, and beyond.  As this column was being prepared word began to spread from Washington that a tentative deal on a year-end government spending bill had come apart.  President elect Trump and Vice President elect Vance – himself a sitting Senator who would have an actual vote – issued a joint statement opposing the measure as written.  

There’s a good chance that by the time you’re reading this at least parts of the federal government could be shut down, pending future funding.  While we’re somewhat used to this occasional routine, this may be a bit different.  Enough Republicans view the election as a mandate to cut spending and shrink the size of the federal government that we can’t presume business as usual, even with the current President and lame duck Congress.

Those cuts are a double edged sword with respect to economic statistics.  Those dollars are freed up for investment or personal spending, but also deduct from the one in six dollars that government spending contributes to our gross domestic product.  

If you’re currently a federal employee, you’re likely not in that group that sees optimism for the next year.  They’re likely keeping a close eye on their spending, and a pullback in their own expenses could contribute to a short term hit to GDP.

We’re also having to “recalibrate” – the Federal Reserve’s preferred term – for our outlook on interest rates.  With progress on taming inflation stalling, they’re willingness to cut interest rates next year was officially cut in half last week.  

And, as a reminder, they only micro manage short term interest rates.  The bond market still sees too much potential for inflation to trade longer term notes at lower rates.  In fact, these rates have been going up due to inflation risks and too many new bonds being issued to finance the federal deficits.  Mortgage rates remain stubbornly high relative to the last few years.

The bet President Elect Trump and his economic team is making is that cutting regulation and stimulating free market investments will grow the economy faster than the federal debt.  They also believe that tariffs on foreign goods will spur domestic production and manufacturing.  They posit this will contribute to federal coffers via the new jobs created as well as the revenue from the tariffs themselves.  They’re less direct on explaining how the higher prices on either the imported tariffed goods or the higher cost to produce domestic products don’t also contribute to inflation. 

In early economics courses, there is a concept used to only study one change at a time so that the effect can be demonstrated and explained.  “Ceteris Paribus” means “all other things being equal”.

As we approach the new year, our national economic team will via executive action and votes in Congress will attempt to change many things at once.  The fate of the world’s largest economy hangs in the balance.  Some changes may end up counteracting others.  Some may not work as intended.

We’re preparing to enter the new year optimistic on the economy.  The new administration and Congress have their work cut out for them to demonstrate success and keep Americans supportive and invested in changes that lie ahead.