While 2017 comes to an end, a number of factors are at play in determining the 2018 economic outlook for the U.S.
The housing market in 2018
A few short months ago, it appeared that the overall U.S. housing market would loosen up, but in the financial deflation aftermath, an unexpected reversal has taken place.
In fact, 2018 has all the makings of increasing surplus demand for several years to come. This unexpected turnabout is only partially due to an improving economy with millions of post-millennials moving out of their family homes, as the 2008 Great Recession comes to an abrupt end. Builders can’t put up new units fast enough.
This has created reluctant potential buyers who are afraid of not finding replacement housing. This fear has reduced inventory shrinkage even further, intensifying housing price increases in most parts of the country. Such activity has predicated an additional 5% price increase over the normal supply/demand relationship.
This demand is further complicated by the limitation of enough buildable land, a drastic shortage caused by rising national costs and easy available financing and reasonable rates for additional new housing. Adding to these negatives are the losses due to the recent hurricanes and natural disasters in Houston, Florida, Puerto Rico, and more. Home builders were already in short supply prior to the need for tens of thousands of carpenters and other skilled tradesmen necessary to repair or replace the unexpected losses due to natural disasters.
There is also a skilled labor shortage as workers are snapped up by commercial construction projects in the affected areas. These skilled workers tend to be more attracted to specialized projects of this nature, which promise longer-term job security and higher wages. Such demand will likely increase the shift to commercial and industrial projects. Even rising mortgage rates, now near a current all-time low, will do little to ease the greatest housing demand pickup in several decades.
Although specific housing forecast increases tend to be risky, some percentages are needed to project the scope of the aforementioned increases. Such 2018 projections are as follows:
- Single-family housing starts at 900,000 nationwide, a 7.5% increase for 2018;
- Multifamily starts will be 345,000, a 4.2% decrease;
- New home sales, 670,000, a 10% increase;
- Existing home sales, 5.6 million, a 1.5% increase;
- Year-end, 30-year mortgage rates up 4.3%; and
- Year-end price increase change up 5%, on average, for 2018.
While much of the cost increases will run in the major parts of the country, which has experienced national increases since the end of the recession, much of the activity will likely occur in the South, Southwest, and Mississippi West as the aforementioned predictions may turn out to be conservative rather than overly optimistic.
The need for infrastructure investment
Shortly after President Obama’s initial election at the height of the Great Recession, the U.S. Senate voted in a near-trillion-dollar debt increase to get the U.S. economy back on its feet.
At that time, it was universally anticipated that this massive bequest would finance a timely infrastructure improvement that had been sadly lagging for more than 55 years, but it was ignored while the administration funded the Affordable Care Act and legislation to promote renewable energy. The administration did not address the urgency of long-delayed infrastructure repairs and the resulting employment-creating benefits so successfully utilized by President Franklin D. Roosevelt during the Great Depression. The administration could have utilized infrastructure repair to reduce unemployment while improving the conditions of inferior highways, railroads, bridges, pipelines and dams.
Even now, it’s puzzling that the Trump Administration is putting no sense of urgency on the more than 55,000 crumbling bridges, a third-rate highway system and an overall national indifference. This is still held back by eight years of President Obama’s executive directives and a seemingly two-term indifference by President George W. Bush.
While President Trump seems preoccupied with healthcare revision, a long-delayed up-to-date tax structure, and disentangling from the Paris Climate Treaty, NAFTA, and the give-away Trans-Pacific Asian sellout, infrastructure seems to be still wallowing on the bottom of the Trump to-do list.
This is especially true since there appears to be an overall lack of understanding by Americans of the urgent infrastructure requirements and the lack of concern from Congressional leadership. This upgrading of the world’s richest nation seems to be at the bottom of the list when it comes to making America great again.
Disinflation and low interest rates
When the four-year disinflationary drop from 2008-2012 sputtered to an end, it was expected that normal inflationary increases would return to overall interest rates. U.S. Treasury yields and commercial bank rates would rebound to levels in the 5%-plus range experienced during most of the 90s and early 2000s.
With the runaway record inflation experienced in the mid-20th century, terminated by the Reagan Administration in the late 1980s, it was expected that the double-digit inflation of the previous period had to be restrained at all costs.
Most of the financial pundits of that time expected a return to a reasonable level of interest rates, which experienced increases during the inflationary period of the Nixon, Ford and Carter administrations that ended with a record double-digit Federal interest rate in 1982.
However, not taken into consideration was the unprecedented shrinkage of U.S. manufacturing, production and employment levels that had shifted to a record 68% GDP consumption range due to a record number of low-priced imports from China, Western Europe and other acceptable-quality-producing nations.
But equally surprising has been the muted bounce-back from the Great Recession, which effectively ended in late 2011. This has restrained the Federal Reserve Board from any substantial interest rate increases as demand for U.S.-made products and services remained at a moderate level. This, in turn, has kept rate return yields at unexpectedly low levels as 2017 ends. This has also caused dividend and rate return levels to remain at unexpected lows.
It has also discouraged a strong level of corporate monetary investment in bonds and various interest rate monetary elements reflecting supply/demand. Instead, most of the increasing monetary levels, steadily increasing worldwide, have invested available funds in global level equity markets. This has been happening at a much higher rate than anticipated when considering the monetary returns expected from most listed global equities.
Conversely, the low rates offered by the broad spectrum of financial sectors (banks, financial institutions, foreign currency, etc.) have maintained a level well below that expected at the current level of financial equity investments. Barring an unexpected surge in federal fund rates to a new round of inflationary uptick, these factors are not expected to change any too soon.
The November 2018 election
After the first year of an Administration that can best be described as “stormy,” the future of the first term remaining, as well as a sure second term, may well rest on the November 2018 mid-term election.
Facing Democrat resistance further complicated by the GOP Freedom Council, President Trump’s immediate and long-term success will become increasingly dependent on the success of his pre-election objectives from here on in. While much of the criticism of the current president’s highly contradictory verbal style tends to be dismissed by his backers, such indifference will become more serious as the mid-term election time approaches.
What is becoming especially serious is the resistance President Trump is meeting from his Republican Party associates on healthcare revision, tax system upgrading, import-exports, national infrastructure revision and more. This internal lack of unification is becoming increasingly divisive politically.
While President Trump’s popularity remains consistent with the blue-collar rank and file, which swung behind him in the last general election, the unaddressed main promises of his campaign are undermining the president’s effectiveness.
Although the Democratic Party seems bereft of outstanding leadership, continued attrition of President Trump’s popularity could undermine the Senate majority sorely needed by the GOP. This is needed to add the necessary Senate triumphs in November. Despite two-thirds of the 34 Senate seats up for grabs in the upcoming mid-term elections being Democrats, nothing less than a major GOP victory in November would be needed to overcome the Republican recalcitrants.
Anything less than a solid Republican victory in November could not only undermine President Trump’s critical governmental issues, but question his backers’ abilities to finance what appeared to be a sure two-term stint only a few months ago.
Oil prices and domestic production
While OPEC’s potential 30-million-barrels-per-day production has been cut by almost two million barrels per day this year, Russia has cooperated by committing to a similar percentage reduction below 10 million BPD in order to jack world prices back up.
However, the U.S.’s production increase from 3.4 million BPD through fracking has also built up to nearly 10 million barrels per day. This has frozen the global daily oil price structure, primarily fulfilling the American nation’s potential 20 million BPD demand.
This has wreaked havoc with even the rare U.S. cooperation of OPEC. The U.S. has maintained full production of its West Texas Intermediate (WTI) light oil, primarily to service the 20 million per day U.S. domestic demand level, by cutting back imports from Saudi Arabia, Venezuela and even Nigeria and Libya, which are shrinking rapidly. Even though OPEC has maintained its almost-three-million-barrels-per-day cutback, its U.S. demand has shrunk considerably. Also, U.S. drilling rigs and other various oil-production equipment costs have also come down considerably.
Furthermore, since U.S.-produced WTI light oil demands less refining than the crude oil available from most of overseas sources, this has also caused a utilization reduction from much of America’s refineries, pressuring the already halving prices from the $100 per barrel that existed through mid-year 2014.
This has caused a significant cutback in U.S. oil shale production most recently, with a long-term outlook projecting prices continued at the mid $40 per barrel level. Despite Hurricane Harvey raining destruction on the South Texas coast in late August, primary increases benefitting therefrom were only temporary, despite their unusual higher price levels during such periods.
While the U.S. is benefitting substantially in oil and liquid natural gas export shipments, this will not increase America’s prices of its huge oil and natural gas production in the short term. But, despite the prediction of substantial price increases by some experts, any expectation of oil prices exceeding the $50 per barrel in the long term are misleadingly excessive.
What lies in store for 2018?
With 2018 just around the corner, there are many indications that the New Year will bring forth unexpected events and some major surprises not yet factored into November 2018 election.
Although foreign policy will provide more than the normally expected surprise events (North Korea, Mideast confrontations, Eurocom disintegration, and the Russian/Syrian/Iranian alliance, for instances), it’s more than likely that the U.S. Government Administration’s manifold difficulties will provide most of the one-second media headlines.
This prediction is especially valid since President Donald J. Trump’s feisty and argumentative governing style will provide unexpected mandates. Anyone expecting a recessive presidential style, absence of constant Twittering or moderation in relationships with antagonistic GOP Senators is kidding him or herself.
Much more likely is an even tougher president who will hold his fellow GOP party members responsible, ready to retaliate when his will is questioned. It is much more likely that President Trump will resort to direct-action course mandates, possibly outstripping the record used by President Obama in his last two years of his second term.
While such direct action will unleash a flurry of legal challenges, expect the president’s orders to be activated before the complicated U.S. legalistic high gear elevates its judicial powers.
It’s a near certainty that sanctuary states, regions and cities will be declared illegal, overriding this unprecedented institutional attempt to give this anti-national historical format the upper hand. Unfortunately, this uniquely inflexible president will likely declare any of these legislative challenges as dangerous attempts to undermine his continued leadership. This could stir up a record outbreak of opposition, especially in cities and educational institutions ready to instigate increasingly violent confrontations at a level not previously experienced in U.S. history.
This will all lead up to the Nov. 6, 2018, mid-term election campaign that will reflect the will of the U.S. voters.