THE ECONOMY

THE 2017 ECONOMIC OUTLOOK

Brian Beaulieu, CEO of ITR Economics, cuts through the political rhetoric to help ECPs understand what 2017 and beyond may hold for their business

Donald Trump’s election as the next president certainly caught many of us by surprise. However, it really does not alter our outlook for 2017.

The leading indicators were going up before the election, and we expect that they will rise post-election. We have been forecasting a general rise in the U.S. economy and the global economy.

The rise is still likely. It probably won’t be any better or any worse, although the newly elected and appointed officials will take credit for whatever happens. The new administration and Congress are more likely to have a bearing on 2018 and beyond.

We see no reason at this time to alter our forecast for a slowing economy in 2018 and economic decline around the first half of 2019. The economy is growing.

We think focusing on the developing period of business cycle rise is the right approach at this time because that is where the near-term opportunities are. Being ready with sufficient labor, working capital, equipment, and visceral fortitude will yield outsized profits through 2018.

This is particularly true if labor costs are well managed. This is even more incumbent upon us than normal because politicians are repeatedly bad-mouthing the economy.

Preparing for a Downturn

There is another aspect of the future to consider, given where most companies are in their planning cycle. Looking at 2017 and 2018 takes us out two years.

We think the business-cycle trend will likely change for the third year, in 2019. Please keep in mind that the 2017 outlook is predicated on ITR business-cycle theory, normal cyclical trend behavior, leading indicators, and identifiable “causal” factors. The outlook for 2018 is based upon ITR business-cycle theory, normal cyclical trend behavior, limited leading-indicator input, and looking for “causal” factors that could take the economy out of its rising trend.

The 2019 outlook is the result of ITR business-cycle theory, very limited leading-indicator input, and speculation regarding “causal” factors that could take the economy out of its rising trend.

What happens on the backside of the business cycle is generally slowing rise and then, potentially, recession. Slowing rise does not always turn into recession.

However, based on ITR Economics’ theories, there are times when a period of recession is more probable than others. The period of late 2018 to early 2019 is one of those times, from our perspective.

We have two long-range empirical leading indicators supporting our view that cyclical decline is likely through that period. However, neither of these long-range inputs is conclusive in terms of whether it will be a recession or a soft landing (slowdown only). So, our outlook for 2019 being a period of actual decline is, at this time, primarily theoretical.

Potential “Causal” Factors

The limited empirical-input trends we look for could create imbalances within the economy and other areas of vulnerability that could, with hindsight, be considered the “cause” of the cyclical recession (albeit mild). Almost by definition, this means something goes awry in the consumer space or the B2B space.

We are primarily concerned about the potential for a shift in consumer health looking that far out. The consumer is generally two-thirds of the economic horsepower for the United States, so it is natural to look for potential problems in this arena. Specifically, we are looking for issues and/or obstacles that may arise that would inhibit the consumer’s ability to spend money.

With that in mind, we set about looking for potential threats to consumer activity. Three potential threats to a healthy consumer in the future are:

1. Higher taxes

2. Higher interest rates

3. Higher energy prices

No one can say with certainty how much higher taxes, interest rates, and/or energy prices would have to rise before the consumer feels threatened because none of these variables operate in a vacuum. Besides their relationship to each other, there is the context of how fast employment is going up, by how much wages are rising, if home prices are still rising, and more.

We do not see employment, wages, home prices, and “other” factors as being the potential threats, as the aforementioned factors are based on current and anticipated macroeconomic trends. That is not to say they cannot turn out to be one of the causal factors to a recession; it just is not probable at this time.

So, what do you do? Plan for growth in 2017 and 2018 and prepare some contingency plans to put in play if the economy goes sideways or downward in 2019.

An economist with ITR Economics since 1982 and its CEO since 1987, Brian Beaulieu is also chief economist for TEC, a global organization comprising more than 13,000 CEOs. He has given seminars across the country to thousands of business owners and executives, with a focus on applying ITR’s economic research on a practical business level. Prior to joining ITR, he was an economist for the U.S. Department of Labor.