In the wake of the most unpredictable year in modern human history, how in the world do I go about predicting what’s to come? At this time last year, if I had bet that three things would happen – that the U.K. would vote to leave the European Union, that the Cubs would win the World Series and that Donald Trump would be elected president of the United States – everyone on earth would have put every penny they had on that bet – and I would now own the entire world.
All along, my predictions have been based on the inverse relationship between population growth and per capita consumption which I presented in Five Short Blasts. Briefly stated:
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 will inevitably decline as a lack of space constrains our ability to store and use many products, especially larger products (like homes and cars, among others). 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 2017:
This year, one factor will dominate all others in determining how 2017 unfolds, and that is the swearing-in of Donald Trump as President of the United States on January 20th. How will his presidency unfold? It seems almost impossible to predict. All I can do is take him at his word on two key campaign promises – promises he repeated boldly and often: first, his promise to put an end to illegal immigration and second (and most importantly) his promise to bring back American manufacturing jobs through the use of tariffs, aimed especially at Mexico and China. He seems serious. When questioned how he could possibly do such things when existing trade deals don’t allow it, he replied “it doesn’t matter. We’ll tear them up. We’ll back out of those deals and make new ones.” While it’s not unusual for newly-elected presidents to back out of and distance themselves from promises made during their campaigns, no one has done so after making promises so often and loudly as Trump. It’d truly be a shock if he settled into a role as another status quo, do-nothing president.
So, with that expectation, here are my predictions for 2017:
- While the world will continue to grow more densely populated in 2017, exacerbating its many woes, population growth in the U.S. will slow to a crawl as illegal immigration is brought to a virtual halt, as legal immigration is cut dramatically and as deportations are accelerated.
- The construction of multi-family housing will practically grind to a halt. Rents will decline. The housing market at the low end will sink into recession while the higher end of the market will boom, along with construction of upper scale homes.
- The Trump administration will introduce legislation to legally withdraw from NAFTA (the North American Free Trade Agreement) and, more significantly, to withdraw from the WTO (World Trade Organization). It will also impose a low level tariff – maybe 10% – virtually across the board on all imports. The WTO’s harsh response will boost Trump’s efforts to stir support for the withdrawal legislation. And, of course, the Trans Pacific Partnership trade deal will be dead, along with the similar deal that was in the works with the EU.
- The headline numbers of the monthly employment reports will be anemic, thanks to declines in part-time jobs offsetting growth in full-time employment. The net impact will be dramatic strengthening in the labor market as evidenced by rising incomes. The manufacturing sector of the economy alone will have added a million jobs by year’s end. Hiring in the construction industry won’t be far behind.
- The above-mentioned tariffs will be part of a revenue-neutral tax reform package that provides nice tax cuts for most Americans, easing fears of tariff-driven inflation which could easily top 3%.
- Janet Yellen will be replaced as chair of the Federal Reserve by someone more accommodating to Trump’s economic policies.
- The economy will be cast into turmoil early on, with a slight decline in GDP and a stock market correction as the world adjusts to the shock of the new trade reality. Things will begin to turn by the end of the year, led by strong growth in the manufacturing sector of the economy. By year’s end, imports will have fallen by 25%.
- Contrary to the predictions of all the experts for growth of 6.5% in China’s economy, it will actually grind to a near halt. It wouldn’t surprise me to see China in recession by the end of the year.
- China won’t take any of this lying down. Tensions with China will be high by the end of the year. They’ll be flexing their muscles and will show their true colors – a global bully who now feels entitled to have global trade tipped in its favor. By the end of the year, it may become clear why Trump began cozying up to Russia from the outset. With China now perceived to be America’s greatest threat, it won’t hurt to have a friend in Russia. But China will also face threats from within – civil unrest driven by a struggling economy and by emboldened demands for democracy from Taiwan and Hong Kong.
- The European Union will continue to come unglued. Fed up with terrorism and economies feeling the weight of declining exports and rampant immigration, nationalism will grow in power and more countries will be on the verge of their own “Brexits.” Germany will be especially hard hit by the U.S. tariffs. Its ability to prop up the weaker economies in the EU – especially Greece and Italy – will be under great strain.
- Great Britain, on the other hand, freed of the EU drag on its economy, will flourish and, early on, will strike a beneficial trade deal with the U.S.
- Japan and South Korea will also be hard hit by U.S. tariffs and both will sink into recession.
What to fear most: a looming war with China. As relations with the U.S. deteriorate, China will no longer feel compelled to keep a muzzle on Kim Jong Un of North Korea. He’s a loose cannon and could do something stupid even if China doesn’t do something stupid first, like attacking Taiwan, attacking shipping in the South China Sea or positioning warships off the west coast of the U.S. If Trump really does press ahead with tariffs big enough to alter the trade equation with China, I can easily see this getting very ugly, not that that alters my view that the tariffs are an absolute necessity to salvage America’s economy.
In summary, 2017 will be a year of tremendous change and upheaval. There’s much to be excited about, but much cause for apprehension as well. Let’s hope and pray for the best.