Economic Commentaries

13

Beginning January 21, 2017 there shall no longer be gnashing of teeth over political gridlock. With republicans gaining control of the legislature and the presidency, reform legislation should be crafted and enacted into law fairly smoothly and quickly ( within six months). There will no linger be any excuse for inaction. In our view policy prescriptions for addressing weak and uneven economic growth should be a top priority. This will involve tax reform and simplification and a roll-back of overbearing regulation. Trade and immigration reform should be part of an economic agenda but in the short term these could be divisive and distracting.

The new administration will assume office in an era of sclerotic global growth and also a structurally rising public sector deficit. However, if the economy's growth rate could be raised secularly from 2% to 3% and ideally 4%, the country would be on a path to gain control over the deficit and debt. To do so, private sector risk taking needs to be encouraged and the credit creation process needs to be unleashed.

Near term three things will be front and center in our view. Markets and governments worldwide will carefully scrutinize forthcoming appointments to key economic posts such as Treasury, economic advisory positions, and trade representatives. Markets will also watch for any threats to the independence of the Federal Reserve. Assuming any post election market volatility is brief, the election should not be a deterrent to near term action by the FOMC. We do not think a rate rise in December is necessarily warranted, but the FOMC is desirous of moving toward rate normalization. In any event we would expect any rate move to be accompanied by soothing and cautious language about policy in 2017.

The third item of near term consequence is the course of an emerging recovery in the energy industry. Markets are rightfully skeptical that OPEC can fashion a legitimate program to control global production in an environment of ongoing excess supply. If OPEC lives down to expectations and prices tumble below $40 and stay there recent improvements in rig activity, and energy and mining industry employment could be short lived. With little else in the economy showing strength this would be disruptive and maybe even recessionary if interest rates keep rising so as to seriously choke off construction activity. We doubt it especially if fiscal policy takes hold in timely fashion. Moreover, falling energy prices should be a deterrent to inflation fears. In short, we could be on a fairly rocky road over the next six months. As Confucius say : may we live in interesting times.

Posted in: General