Uncertain Economic Issues

The stock market continued its upward march during the third quarter. Large company stocks ended up 4.5%, while small companies rose 5.7%, and foreign stocks were up 5.4%. Bond returns for the quarter broadly measured— were also positive, up 0.8%.

These results arrived amid a backdrop of generally positive global economic news. IMF economists believe the pickup in global economic growth will remain on track and have expressed particular optimism for developed European economies. Though difficult to predict reliably, there is some analyst consensus that foreign stock markets may present better opportunities in 2018 than U.S. markets.

This is in part because the U.S. is now in an (unhurried) interest rate increase cycle. Rising interest rates are known to have a cooling effect on an economy. You might think of low rates as oiling-up the economic machine, while higher rates can slow the machine, to a degree. A recent Wall Street Journal poll of economists showed that the majority expects the Fed to raise rates once more this year, in December.

The Fed announced in September that it will begin undoing the extraordinary steps (known as “quantitative easing”) it took to stabilize the economy during and since the financial crisis. These historic measures included the Fed purchasing trillions of dollars’ worth of bonds in an effort to hold down longer-term interest rates and stimulate the economy. Beginning in October, the Fed will begin discharging these holdings by allowing bonds they own to mature without reinvesting into new bonds – as they have done until now. This may also serve to cool the economy, just as buying them helped to warm it.

Lackluster wage growth, both in the U.S. and abroad, has been a persistent problem for both workers and national economies. Wages have edged higher in recent months, though overall labor expenditures are not growing nearly as quickly as they did in the years before the 2008 financial crisis. During the post-2008 recovery, labor has not benefited as much as expected from improvements in economic performance and corporate profitability. A recent measure showed U.S. wages rising just 0.5% for the year ending in July, bringing it to a paltry 5.7% higher than a decade earlier—both figures are well behind the rate of inflation. Without wage gains, the average household can’t spend more, which in turn restrains overall growth— particularly of consumer driven economies, as we have in the U.S. This may help explain the economy’s sluggish growth since the recession.

Political theater and unpredictability in Washington remains a wild card for the economy. As of this writing, Congress is working out the details of federal tax reform. While tax cuts for businesses and top income earners are billed as “job promoting,” economists disagree on whether tax cuts actually translate into more jobs and higher wages or greater corporate profitability. Academic research on the subject has never supported the idea that business tax cuts have a causal relationship with higher wages, although tax cuts do correlate with higher federal budget deficits.

The well-publicized buyout of Whole Foods Markets by online retailing giant Amazon reveals an interesting tension for resilient investors. On the one hand, the buyout includes the welcome promise of lower prices for “whole paycheck” shoppers and the potential of grocery delivery—a service that could drastically improve the lives of the 10% of Americans who live in “food deserts” (geographic areas without grocery stores providing affordable, healthy food options). Residents of food desert tracts tend to have lower levels of education and to earn lower incomes than regional averages. Such socioeconomic differences between food deserts and other areas suggest that such demographics play a role in food distribution systems and thus food access, particularly to nutritional food.

On the other hand, the new giant enterprise would eclipse the development of smaller, local enterprises that could better meet the particular needs of local communities and recirculate profits in the region, creating a positive multiplier effect. Think farmer’s markets, worker-owned cooperatives, and community supported agriculture (CSA) farm share programs. This small-scale, decentralized approach is more aligned with the Natural Investments “resilience” framework. Not only does it take the long-term economic health of neighborhoods into account; it creates more opportunity for social interactions that are critical to community building and resilience.

Scott Secrest

Welcome to my archive of newsletter articles and blog posts. For more information on my service offerings, please go to my advisor webpage.