There’s boom and inflation ahead, Alan Beaulieu, principal, ITR Economics, told the National Association of Wholesaler-Distributors at their annual executive summit in Washington.
But heed this warning: The boom will be followed by a Great Depression in about 12 years. It will be like the last one, with unemployment reaching a sustained 25%, except the banks won’t fail, he added.
This presents you with both opportunity and challenge. The opportunity is for significant growth in your business and your personal financial situation. The challenge is to resist the temptation to excess as you prepare for the opportunity which a Great Recession might give.
Beaulieu is worth listening to because his forecasts have been extraordinarily accurate over the years. ITR’s forecast for U.S. Gross Domestic Product, for example, in the last 24 months was 98.5% accurate. For U.S. industrial production, 96.8% accurate. For retail sales, 99.4% on target.
That boom and inflation that’s coming won’t come until the 2020s, he said. So what about this year and next?
This year will see steady economic growth, but not as dynamic as last year. It will slow significantly toward the end of 2018, and next year will see the country in a “technical recession.”
Life will be tougher for businesses in New York, Massachusetts, Connecticut, Rhode Island, Pennsylvania, Ohio, New Jersey, Maryland, Virginia, Michigan, Illinois and California, he said, because those states are losing population. If a rising tide lifts all boats, a sinking tide lowers all boats. From July 2015 to July 2016, the all lost more than 25,000 residents. California lost 191,367.
Where are those people going? Southeast – the Carolinas, Tennessee, Georgia, Florida – and West – Texas, Colorado, Arizona, Nevada, Oregon and Washington State.
The rest of the states are pretty much steady. Utah, Idaho, Montana, South Dakota and Arkansas all gained less than 25,000 residents. The remaining states all lost less than 25,000 residents.
If you wonder why politicians from the Big Losers – New York, California, Illinois, etc. – are screaming about President Trump’s immigration policies it’s simple: “If immigration falters, those states will have a problem,” Beaulieu explains, adding:
“You won’t get 3.5% GDP growth without population growth, and we don’t have a high enough birth rate” to have population growth without immigration, he said.
That means retail sales will slow this year and next.
The economy, as measured by GDP, is doing “exceptionally well,” he said, growing at a 3.4% pace.
While President Trump, like any politician, likes to take credit for this, Beaulieu said the simple fact is that “the economy was on the way up before the election.”
The fundamentals of the economy aren’t about politics, he explains. “The economy is going to slow late this year and a lot next year,” he says, adding that it will be a cash issue causing the slowing, not a crisis.
“There’s a lot of optimism right now,” he says, adding: “That’s a danger sign. It’s a time to worry about how you’re going to handle the change that is coming.
Plan for an off-year in 2019, Beaulieu said. Retail sales will slow. As for beverage alcohol, “all you’ll see is a shift in brands, not in quantity,” as consumers trade down.
View 2019 as a year for building. “Next year, you’ll have time to focus on changes in your business. But after 2019, we get into the Roaring Twenties.”
For the first time in 33 years, the U.S. will experience significant inflation during the 2020s. It will be easy for business to raise prices, and wages will go up.
What to do now. Actions you take now may have significant consequences when the Great Recession hits in the 1930s. Here’s what Beaulieu recommends:
- Reduce and extinguish debt by 2030. The goal is to be debt free by then.
- Be relentless in driving efficiency in your firm. Do fall into the traps of being loose with spending
- Build reserves – both in your business and in your family – in stocks.
- In 2029-30, sell the stocks and move to five-year bonds issued by safe governments. Right now, Beaulieu considers Canada and Australia to be safer than the U.S. Government.
- In 2035, when those bonds mature, you be able to acquire great companies and properties at sharply reduced prices.
Looking at the global picture, Beaulieu ticked off what makes him nervous, and what doesn’t make him nervous.
“Don’t be worried about North Korea,” he said. Kim Jong-un isn’t crazy and won’t do anything stupid.
But you should worry about China. Not as a military threat, but for its influence on the global economy. After prospering with free trade, the country’s Community elite is now focusing on state-owned enterprises. “Governments always believe they can see, plan and make it better than anyone else.” But they can’t, he said.
Health care will be a driver of the Great Depression in the 2030s. “Washington won’t have the capability to deal with this,” Beaulieu said. “Political pressure will shift from the Boomers to the Millennials,” and with health care costs skyrocketing, “they will probably say, ‘Let him die.’ You should worry about the cost of health care.”
Also of concern: The federal budget. “As interest rates go up, the federal deficit will become unmanageable,” he said, adding that by 2030 mandatory spending – interest on the national debt, Medicare, Social Security, etc. – jumps to 69% of spending.”
But won’t tax reform make that problem if not go away at least more manageable? Tax reform “won’t deliver what we’re told it will deliver,” Beaulieu said. “There’s just not a lot of correlation between tax rates and GDP going up.”
To be sure, in the wake of the passage of the tax bill, “there will be a short surge in spending, but don’t believe it will last.” For one thing, while there was a lot of discussion about corporate income tax rates exceeding 35%, about half of all corporation have been paying 18.4% of their revenue in taxes. For those firms, the reduction in the federal rate to 21% just isn’t all that exciting.
For another, “we’ve stopped saving in the last year. That’s an indicator retail sales will slow,” Beaulieu said. And, he added, despite all the talk about Amazon, the fact is that Amazon is only 2.8% of all retail sales. Plus: “Sales of brick-and-mortar merchants grew faster than Amazon.
With the U.S. public debt rising to 121.3% of GDP in just two years, Beaulieu warns the U.S. is at great peril. “A foreign nation can decide the U.S. doesn’t have the cash to operate,” he warned, noting that China can cut the U.S. off from its financial resources “in a second.”
Already, he added, Japan is no longer by U.S. Treasury debt, and because the U.S. is now energy self-sufficient, we’re not buying Middle Eastern oil, so Saudi Arabia and other Mideastern countries no longer have an incentive to buy Treasury bonds.
Despite all the gloom-and-doom talk, Beaulieu noted we are living through some really good days. “We’re the No. 2 exporter in the world. Exports are 11.6% of GSP, and 66% of those exports are goods,” he said. Also:
- Millennials will be inheriting a country that’s energy independent. “We don’t need the Middle East anymore,” he said.
- Manufacturing is going up. But Trump will have to “do something” about NAFTA. Despite the President’s rhetoric, “it will be a light touch,” Beaulieu says.
- Leading indicators are up, but both manufacturing and services see slower rates of rise.
- Business has $2 billion of cash to invest in new plants, products and people.
- Stocks are going up, but Beaulieu expects a 10% correction soon.
- The capital goods rate of rise will slow to 1.3% next year from 4.6%. That slowdown will last a couple of quarters.
- Employment is doing great; “there’s no shortage of jobs.” Five million jobs are open, he said. “We need more people in better paying jobs in manufacturing and distribution.
- Americans are doing really well. “You’ll face wage pressure,” he said. Retention will be key to corporate success, he added. “Your No. 1 problem is what are you doing in H.R.”
- Delinquency rates on consumer debt are low. As for student loan debt, “wage inflation will wipe student debt off” as something about which to be concerned.