Economist Talk Sheds Light on the Future

On February 14, FBLI family members gathered at the Wisconsin Club’s Country Club to hear Dr. Mike Knetter of the University of Wisconsin Foundation speak on his vision for our economy. The hour-long presentation offered many insights including:

2018 Outlook
-S&P 500: +8%
-Real GDP growth: +2.25%, with momentum waning toward year end
-Expect unemployment to remain around 4%
-Labor force participation rate slightly up, and wages up faster
-Inflation: +2% and rising (this already feels low to Dr. Knetter)
-US $ stable at its now weaker level against sovereign currencies (and unstable against cyptocurrencies will fall with unilateral trade battles)

Trends Entering 2018 (as of mid-January)
-Real and financial momentum
-Rising wealth and consumer confidence
-Business-friendly regulation and tax reform (Corporate and top personal rate reductions)
-Underlying fiscal challenges masked by cyclical highs and very low interest rates
-Increased geopolitical uncertainty due to U.S. policy shifts (is that behind the weaker dollar?)
-Increased polarization of U.S. electorate
-Fundamentals are driving us forward, but the potential for instability seems higher than normal.

Mega Trend #1: Economic Momentum
-The Economy is near full employment and growth has been positive since 2010
-This growth is synchronized across the globe
-Equity  valuations have driven household net worth to new heights
-Interest rates and inflation are low (but now rising). The dollar is weakening and oil prices are picking up in concert
-Regulators are more business friendly
And all of these factors are contributing to consumer and business confidence.

Mega Trend #2 Pro-Growth Tax Reform
-Recent tax reform is the biggest change in  the code since Reagan in the 80s
-The tax cute is estimated to be $1.5 trillion over a decade
-80% of filers will have lower taxes, 15% will be about the same, 5% will see an increase
-Reduction in corporate taxes aims to keep and attract  more production in the U.S.
-Individual rate cute may add stimulus to spending, but has the biggest impact on the growing deficit

The Case for Continued Growth
-Recovery is broad based in production and employment
-Business-friendly administration
-Strong earnings momentum, corporate tax cut, and FOMO will fuel equity values
-No obvious imbalances
-Economic outcomes driven by decisions of many actors, so the ship turns slowly absent  a catalyst

What Would End the Expansion?
-Overheating is the most like culprit
Fiscal Stimulus is being added to a full employment economy
A tighter labor market and weaker dollar fueling expected inflation
The Fed may need to tighten faster than expected
-An unforeseen event (like an act of terrorism)  turns sentiment negative, making actor cautious and markets skittish
Geopolitical crisis
Administration missteps or legal issues
-A negative catalyst, or a combination of them, could cause a sharp reversal

Is the Long-Term Outlook Improving?
-Supply side factors:
Domestic (and immigrant) labor force growth is slowing
Labor productivity has declined and remains very low
Commitment to education and science is declining
Infrastructure riddled with deferred maintenance
U.S. leadership in global trade is waning
Fiscal deficits could explode as taxes are cut and interest rates creep up…making it hard to address problems

Concluding Thoughts: We might have a big hangover after this party ends.

Download the entire slide deck here: FBLI Economic Outlook 2018