The US Economy is Fine Now, But Watch Out for 2020

Rusty Tweed

Rusty Tweed

According to Paul Ashworth, who serves in the Capital Economics as the chief U.S economist and also the winner of March Forecaster of the Month award, he mentioned that the current status of the U.S economy is doing well, but as the next few years comes by, the stimulus is going to start fading away.

Mr. Ashworth added that his team was optimistic about America’s stability, and they assumed for such a long time that Washington’s United Republican government would bring about a good amount of stimulus, which happened and they were right. The move to cut taxes and end the spending restraint has given the economy of the U.S a great boost to survive the next two years.

What is in store for the U.S economy 2019 and 2020

After the next two years, what is going to happen? Ashworth stated,” There is a growing concern that the fiscal stimulus is fading, and this is bringing about a major concern.” For 2019 and 2020, Ashworth is expecting these years to be weaker because the Federal Reserve is expected to cut the country’s interest rates in 2020.

According to Ashworth and his team, they see that the economic projections of the Federal Reserve are optimistic at growing way above the trend up to the year 2020. This projection seems to be too far-fetched if you ask Micheal Pearce who is a senior U.S economist. He continued to share his sentiments on how the fiscal stimulus will send a boost to spending and incomes for one final time, unless the economy finds a new source of supply capacity to grow the economy; otherwise, growth will start to drop.

What is expected to happen after 2020

According to economists, they expect a modest downturn in the economy which should be reversed quickly after 2020, because the expansion will take some time to end. But by the time the downturn will be ending, the U.S economy will have undergone the longest expansion in its history.

Ashworth advises that people should think about what is going to happen in the next downturn. Although they expect it to stay for a relatively short time, it won’t be as damaging as the great recession that occurred in the year 2008-2009.

Some of the reasons that might cause the economic downturn

There is a premise that Ashworth does not accept. The premise involves how the Republican fiscal plan revolves around the supply-side economics that assumes businesses have for the longest time been holding back on investing in new supply because of high taxes and regulations.

Ashworth’s argument is related to how countries that had low corporate tax never see an economic boom in their investment afterward. He added that the U.S is known to raise its capital spending because supply is starting to hinder growth, and not because companies have been set free.

There is also the issue of the trade war that is going on between the U.S and China. This kind of talk is great for politics but is bad for economics. But will be seen in the next few months is the U.S government accepting some small concessions and reign supreme on the trade wars; the same way South Korea’s case was handled and is also expected to happen with NAFTA negotiations.

The Future of the U.S Economy for the years to come

Since the Trump Administration took power, he created a positive economic sentiment that was also taken by the Republican majorities. Trump’s administration pledged that they would pursue the reform, tax cuts and policy trifecta of deregulation.

What is known is that sentiment usually goes both ways. Just like the pro-business way that Trump is using can boost the confidence of the economy, the perception of leader who is not-for-business can bring down the confidence. Since sentiments influence the behavior of people, their impact is far-reaching. But the sentiment is not a great way to measure the actual economic prospects and development.

So far, when you look at the market’s reaction to Trump’s victory, there has seen a rise in stocks to multiple highs, but that has not been the case on “hard data.” Economic forecasters have only made some modest increase in their projections.

If the confidence in the US economy does not trickle down to hard data, expectations that are not met on corporate earnings and economic growth could cause the sentiment of the financial market to slow down, which will fuel market volatility and shoot down asset prices. This scenario will sputter the US engine to cause the global economy to slow down, especially if these scenarios cause the Trump administration to come up with protectionist measures.

Looming “Debt Hangover” Will Crush The Economy

Rusty Tweed

Rusty Tweed

A time will come when the U.S will inevitably have a debt hangover, it may not be the coming week or next month, but it will soon come. The continued effects of continued lowering of the tax-revenue, government spending, always-increasing interest payments, and increasing compulsory welfare payments will soon be felt, and that is a feeling that will not be a pleasant one.

How we got here

The current national U.S debt that is publicly held is 75% of the GDP. Although that number can be shocking to the average citizen, to economists, they see this number as a good figure. Before the recession of 2008, the national public debt in the U.S was at 35% of the GDP. Over the last decade, the debt has grown by 40%. Why is that the case?

The answer lies in government spending. The U.S government decided that the only way to get out of the recession was to spend. This was championed by the Federal Reserve and a handful of economists who encouraged monetary and fiscal authorities to continue deficit spending and issue more debt to institutions and individuals or borrow in order to spend. That decision worked, but some people argue that there was not enough money that has been spent.

The impact of debt hangover in the U.S economy

Currently, the U.S is undergoing low unemployment rates and a long period of growth that has never been seen in the history of the country. According to the Congressional Budget Office, it was highlighted that by the year 2047, while maintaining the same trend of fiscal policy, the U.S debt ratio will linger around 150% of the GDP. Imagine what is happening between Italy and Greece happening in the U.S; that is how bad the situation can get for the U.S.

The World Bank has put up estimates that every percentage point that goes above the debt to GDP ratio of 77% would lead to a decline in the annual growth by 17 basis points. This can translate to a loss of 12% of the growth of GDP in the next 30 years. Looking at it in another perspective, it would mean that the U.S economy will have stopped growing for over four years.

If you think that is the only consequence of the existing fiscal policy, you are wrong. The flexibility that Congress has on implementing expansionary fiscal policy in economic downturns will be less. Investors will be in need of higher rates of interest to be able to invest in an economy that is increasingly becoming volatile.

When the cycle of net interest payment increases and higher interest rates are resent, the result will be a net interest payment that will eclipse other major spending programs by 2047. If we decide to look at Medicare and Social Security, it will require large investments to keep the short-term solvency.

What the economists say

There are economists who argue that if the economy could be spurred faster than the compounding interest payments, and it ignores entitlement programs, then things would be okay. But spending is not the issue; the problem rests on the revenue and the GOP tax plans which do not help.

The GOP tax plan economics is not hard. When you talk to the Keynesian economists, they would argue that the tax cuts spur economic growth and stimulate the economy. But most of the economists are not supporting the tax plan and the basis behind it, especially when you look at the current economic status. Cutting taxes is not something that is needed at this time.

Most economists believe that the lack of tax revenue will increase the chances of a financial crisis. Estimates by the Dynamic CBO propose that the growth of the GDP due to tax cuts will be dismal and will be below the required levels that are to mitigate the impact of an increased portion of the U.S national debt to GDP.

At the moment, the U.S government is not armed with the right tools to deal with the debt hangover that is looming. Within the next decade, the economy will still maintain the healthy standards. The U.S will not be bothered by the impacts of the existing fiscal policy until the time when it is too late.

The GOP tax plan consequences should not be understated, and it was not only the tax plan that placed the U.S in this state. There needs to be an implementation of reforms that will alleviate the impending consequences of the existing fiscal policy. But sadly, the changes in policy that are needed do not appeal politically.

Revenue needs to be raised by the Congress, and spending should be cut without impacting Medicare and Social Security. There are a number of options that the CBO provides, and they are 115 in total. These options are meant to control discretionary and mandatory spending and stimulate revenue.