After living through a campaign season that featured anger and distrust as the primary themes, we may well see hope and uncertainty as the new themes in 2017. The reality is that the economic outlook over the next 12 months is far less certain than in previous 12-month windows due to the results of the U.S. elections and uncertainty about how critical upcoming elections in Europe, especially Germany and France, will shape global policy and global economies.
The recent Federal Reserve move raising the key interest rate by 0.25 percent and the U.S. Dollar Index crowding its all-time high for recent years will continue to put pressure on agricultural commodities that are heavily dependent on exports. The cost of capital sources with interest will increase the cost for producers to hold crops with anticipation of better prices. That, coupled with the uncertainty of possible changes in foreign trade policy, will challenge producers in their marketing strategies.
From a national perspective, the Republican sweep and President-elect Donald Trump’s platform suggest prospects for tax cuts and tax reform; increased infrastructure, energy and defense spending; a reduction in the regulations affecting a number of industries; a more restrictive and potentially hostile trade policy; and sooner and faster increases in interest rates if policy changes result in either faster economic growth or faster inflationary growth.
If government remains gridlocked, however, it is unlikely that the economy will break out of the 1.5-2.5 percent growth pattern that has held since the recovery began.
Based on President-elect Trump’s platform, these are the major policy areas to watch.
• Tax policy: Reductions in the personal and business tax rates are on the table as well as the potential for a more comprehensive tax reform package.
• Fiscal policy: The focus of President-elect Trump is on infrastructure, energy and defense spending.
• Regulatory policy: President-elect Trump has made it clear that he wants to reduce the role of government and reduce regulations. This holds the potential for major changes to regulations related to financial services, health-care, energy and environment.
• Trade policy: The prospect of a more restrictive and potentially hostile trade policy exists, especially as it relates to Canada, China and Mexico.
• Monetary policy: If policies and actions implemented by Congress and the president result in either faster economic growth or faster inflationary growth, then the Federal Reserve would probably raise interest rates sooner and faster.
Regardless of the political environment, there is one fundamental economic reality that we should not forget. Historically, the average business cycle has lasted 84 months. The current business cycle is into its 90th month. Even with the potential boost from a changed political environment, the reality is that we are closer to the end of this business cycle than the beginning.
Sound risk management practices call for advance preparation; it is best to plan for the next downturn when times are good. As the old Aesop’s fable counseled, it is better to be the “ant” and have a plan ready when hard times arise than the “grasshopper” and simply hope that the good times continue. On that note, the best advice I can give is the following:
• Stay focused on your business and what makes you successful, and avoid the noise and distraction of the 24/7 news and information stream.
• Develop your “disaster recovery” plan for when the business cycle ends and the next downturn comes, whenever that may be.
Steve Scranton is the chief investment officer for Washington Trust Bank. He holds a chartered financial analyst designation and has over 30 years of investment experience. Throughout the Pacific Northwest, he is a well-known speaker on the economic conditions and the world securities markets.