Slower Growth in 2018

This perspective from Hoisington Investment Management sees slower growth in 2018.

  • The consumer savings rate dropped to a 10-year low of 2.9% in November 2017, from 5.9% in October 2015. This expansion of consumer credit accounts for much of the economic growth in 2017 and will not be sustained.
  • In 1820 the economist David Ricardo theorized that funding the Napoleonic Wars through debt or through tax increases were equivalent, an untested theory called the Ricardian Equivalence. Recent anslysis has shown Ricardian Equivalence to be correct. Applied today to Trump’s tax cuts, in their words:

In short, these results align with Ricardo’s theory; although individual winners and losers may arise, a debt-financed tax cut will provide no net aggregate benefit to the macro-economy.

  • The brunt of recent tightenings by the Federal Reserve will finally start to be felt in 2018.
  • The yield curve will flatten.

Finally, their summary:

The flatter yield curve will further tighten monetary conditions. This monetary environment coupled with a heavily indebted economy, a low-saving consumer and well-known existing conditions of poor demographics suggest 2018 will bring economic disappointments. Inflation will subside along with growth, causing lower long-term Treasury yields.

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