I usually publish these predictions in November. But, once again, I’m a little late this year. 2014 was another crazy year at the Murphy house.
Last year, I predicted the end of the “flash-in-the-pan” recovery that had taken shape in late 2013. Obviously, it didn’t turn out that way. (See https://petemurphy.wordpress.com/more-good-stuff/predictions/2014-predictions/.) After a rough first quarter in which GDP fell by 1.6%, the economy got on a roll. Investor euphoria over central banks’ continuation of money-printing stimulus and record close after record close on Wall Street carried the economy further than I expected. So, did I make a bad call for 2014, or was it simply an early call? I believe that 2015 will prove it to be the latter.
So here goes. My predictions are based upon the economic theory I’ve proposed in Five Short Blasts. To very briefly restate my theory:
As our population (both the U.S. and the world as a whole) continues to grow beyond its optimum level, forcing people to crowd together, per capita consumption inevitably declines as a lack of space constrains our ability to store and use many products, especially larger products. As per capita consumption declines, especially in the face of ever-rising productivity, rising unemployment and poverty are inescapable. This same effect occurs when we attempt to trade freely in manufactured goods with nations that are already overpopulated. The more overpopulated our trading “partner,” the worse the effect.
Only actions to stabilize our population (especially reducing immigration) and action to restore a balance of trade through a sensible return to the use of tariffs have any hope of mitigating these effects.
Back-drop for 2015:
In addition to the effect of my theory stated above, the following issues form a back-drop that will shape events in 2014:
- The world population will continue to grow at approximately 1% per year, adding another 70 million people. The U.S. will do likewise, adding another 3 million people. Making matters worse, the Obama administration is in the process of unleashing a tidal wave of illegal immigrants on the economy. The corporate world welcomes all of these new consumers, but already has plenty of capacity to meet their needs. Thus, all are destined for the unemployment line. Population growth will drag on the economy in 2015.
- In 2014, the U.S. trade deficit in manufactured goods worsened to record levels. This trend shows no sign of letting up.
- The U.S. has had two “break-out” quarters in 2014 in terms of GDP growth. It may last into the 4th quarter as well, driven by holiday shopping. But this recovery continues to be driven primarily by the “wealth effect” of a rising stock market (propelled by continued easy monetary policy by the Federal Reserve). However, while the market was still considered fairly valued at the beginning of 2014, most analysts now agree that it’s getting pretty pricey. Investors are getting nervous about preserving their gains.
- Economic data in late 2014 is showing signs of a slowing economy once again. The housing market has stalled again. The growth in manufacturing is slowing. Durable goods orders are slowing.
- The U.S. has been an island of growth in a world where the economy is stalling or even slipping into recession. Both Europe and Japan have stalled. The Chinese economy is slowing more quickly than most (not I) expected. Russia is in recession. Can the U.S. avoid being dragged down by the global economy?
- Central banks have leaned heavily on the printing of money to prop up economies all over the world, including the U.S. Can they keep it up? This is truly uncharted territory for these banks and there is some nervousness about unintended consequences if it’s continued. For example, there is the moral hazard that arises from the decoupling of the relationship between money and work.
- Federal deficit spending has declined to the point where it is less than the trade deficit, resulting in a net drain of money from the economy.
- Despite the decline in unemployment in 2014, incomes have barely budged. Consumers rode a wave of optimism and threw caution to the wind in 2014. Can they keep that up much longer? No doubt, the plunge in gasoline prices should help to prop up that sentiment for a while.
- The low oil prices are nice, but the shale oil boom in the U.S. has been an engine of growth. It’s likely that there will be some big cuts in this industry in 2015.
- As I said last year, the U.S. and, indeed, the entire world is rapidly approaching a retirement crisis in which an aging population has been stripped of its pension benefits and has spent its savings to maintain an illusion of prosperity. At some point, this has to become a big drag on the economy.
- At the same time, many young people are saddled with huge student loan debt. Never mind the risk to the banking system that made these loans; this is a big drag on the ability of these workers to consume. We’ve all seen the stories. Aside from tiny apartments, clothes, food and smart phones, that’s about all they can afford. That’s not enough consumption to keep the economy growing.
Given that backdrop, here’s what I see in the year ahead. All the analysts are predicting the U.S. economy will build on its 2014 gains. I don’t.
- The economy will stall in 2015, with GDP falling to sub-2% growth.
- Official unemployment will end the year above 5.8% (the current rate as of November, 2014). True unemployment (my “U3A” calculation which increases the labor force as the population grows) will actually rise from its current level of 9.2% to something higher than 9.5%.
- The U.S. trade deficit in manufactured goods will worsen from its current level of $50 billion per month to $53 billion.
- The Federal Reserve will not raise interest rates in 2015 as it once again grows concerned about under-utilization of the labor force and flagging economic growth.
- Growth in China’s economy will slow from the current rate of 7.5% to less than 6%.
- Contrary to the forecasts of the experts, bond yields will remain low. The 10-year treasury yield will remain below 2.5%. Simply put, weak growth won’t support higher yields.
- Stocks will rise in 2015, but less than 10%, and the market will be volatile.
- 2015 will end with the economy on the verge of tipping back into recession.
If you have followed this blog, you know that my predictions tend toward the pessimistic side. That’s because nothing has been done to address the two major issues that are dragging heavily on our economy – free trade with badly overpopulated nations and continued population growth beyond the economically optimum level. One might say that if I keep predicting economic gloom and doom year after year, I’m bound to be right sooner or later. To which I respond, how long can the economy be propped up with money-printing, deficit spending, sub-prime lending and other gimmicks? These tactics are eventually doomed to failure.