As 2017 draws to a close it is worth looking back at the biggest economic stories of the year and forward toward what we should be watching for in 2018. After the best economic performance in a decade during 2017, many people are looking toward 2018 with great caution, wondering when the next recession will hit or the next bubble will burst. This looks backwards and forward will focus on what was happened in the economy in 2017 and what factors could threaten the continuation of our newfound economic growth in 2018.
1. The return of economic growth
The top economic story of 2017 is surely the return to more normal economic growth. All indicators are that the fourth quarter of 2017 will make it three straight quarters of over 3% growth in real GDP. That would be the first such three-quarter-long streak in fourteen years. If we make it four straight quarters that will be the longest streak in almost two decades, since a fifteen quarter run from 1996-1999 under President Clinton. This is a huge deal because economic growth helps everybody and increases the ability of society to provide for its citizens either directly (through the market) or indirectly (through private charity and government redistribution).
2. A roaring stock market
The stock market is also clearly one of the biggest economic stories of 2017, having set a record for the number of record highs hit in one year. This was also the first year ever that the stock market went up over all twelve calendar months. These stock market gains are not just making the rich richer, but are also fattening the retirement accounts of millions of ordinary Americans and shrinking the underfunded pension problem for millions more Americans who still have pensions, not defined contribution retirement plans. A rising stock market helps the vast majority of people, even those who don’t think they are invested in the stock market.
3. Tax reform
Tax reform is another of the big stories of 2017, the first time Congress went beyond just tinkering around the edges of the tax code in thirty years. Changes to the corporate tax system should spur business investment and increase economic growth, employment, and wages at least modestly. Tax cuts for individuals mean people have more money to spend. It also means that the eventual reckoning with our national debt must happen a bit sooner, but in the short-term tax reform should provide an economic boost.
4. Retail realignment
Another big economic story of 2017, perhaps overlooked by many, is the massive realignment going on in the retail industry. Yes, you probably noticed that Amazon bought Whole Foods, but we are seeing two distinct revolutions in retail happening separately but simultaneously. First, we are seeing the accelerating death of the retail middle in terms of price and quality. Sears, Macy’s, and their like are suffering tough times and closing stores as consumers opt more and more frequently either to go the discount route (Walmart, etc.) or purchase select items from luxury (or at least mass-luxury) retailers. The Amazon-Whole Foods merger combines companies at both ends of this retail spectrum and does not bode well for those aiming at the middle. The second revolution is in online retailing and involves both more brick-and-mortar retailers getting serious about their online efforts (e.g., Walmart) and retailers coming up with innovative ways to combine physical and online presences. Online purchase and in-store pickup is becoming commonplace and partnerships such as Amazon-Whole Foods will allow for hybrid purchasing where some items are bought in advance online while others are chosen and purchased in person. The consumer will then be able to head home with all her purchases completed in one simple outing.
5. Bitcoin and cryptocurrencies go mainstream
Finally, while it is really a sideshow to the actual economy, any list of economic stories from 2017 needs to include Bitcoin (and cryptocurrencies in general). While cryptocurrencies did not start in 2017, 2017 was the year that they reached a level where most ordinary people knew what they were, rather than just being a haven for the privacy-obsessed and criminally minded among us. As I have written previously, bitcoin and its crypto-cousins are not really currencies but speculative assets. Currencies are just a store of value that people can use to avoid the hassles involved in bartering for everything. You don’t want to profit off your currency, or to lose, just preserve your money until you spend it. Bitcoin and many other cryptocurrencies have been surging (and occasionally plunging) in value as awareness of them spreads. It is still just a new form of gambling, but it was definitely a big story in 2017.
Looking forward to 2018
Looking forward, 2018 is setting up as a year of cautious balance from an economic point of view. We have a rather mature expansion which has accelerated its rate of economic growth. Everyone is wondering when the next recession is coming, torn between investing cautiously in preparation and boldly to continue capturing these late-cycle stock market gains. Given the tension between these two opposing desires, here are five things to watch that will help you tell which way the economy is tipping in 2018.
1. Consumer confidence
Consumer confidence has reached post-recession highs under President Trump and is one of the best things to watch if you are worried about a coming recession. While consumer confidence does overpredict recessions, we haven’t had a recession in over 40 years that wasn’t preceded by a sustained drop in consumer confidence. So, don’t panic if it drops for a month or two, but three, four, or more months in a row of a downtrend should be viewed as a flashing warning sign for the economy. Consumer spending is about 70% of the U.S. economy and when we aren’t feeling good about the economic future, we scale back sharply on discretionary purchases, especially big-ticket items.
2. The yield curve
An inverted yield curve is another foolproof recession signal. The yield curve is simply a plot of interest rates on the vertical axis and term length on the horizontal. If short-term interest rates are higher than long-term rates, the curve is inverted. Since there is more risk in longer-term loans, the only explanation for an inverted yield curve is that lenders expect lower average inflation in the longer-run and the reason they think that is they are anticipating economic weakness–a recession. The Federal Reserve is going to keep raising short-term rates (which they have more control over) in 2018 and if those short-term rates go above longer-term ones, prepare your portfolio and personal finances for a recession.
Is the higher economic growth of 2017 a blip or a welcome return to longer-term trends? Everyone wants to know the answer to that question. If GDP can keep growing around 3% annually, the economy is safe and the stock market could correct, but won’t crash. In recent years the first quarter has had very weak growth, so shrug off the first-quarter figure between 1 and 2%, but anything too weak then, or even steady slowing throughout 2018 could be a sign that the expansion is on its last legs.
The last two years have finally seen some solid wage growth, with average earnings rising about 2.5% per year. If wage growth continues at that speed or even picks up a bit thanks to tax reform, then the economy should be in for some pretty smooth sailing.
The final monkey wrench to watch out for is a trade war. If President Trump takes action that leads to significant interruption of trade flows, a recession is more likely than not. The U.S. economy overall greatly benefits from international trade, even if some individuals and companies are harmed. Getting into a trade war with China, Mexico, or Canada (just to name three possibilities) will cause harm to American farmers, manufacturers, and consumers suddenly facing higher prices for many routine purchases. This would be a classic supply-shock recession and could begin with the very little warning. Keep a watch on all trade-related issues.
There you go, a summary of the year past and some key stories to keep an eye on in 2018. Happy New Year to all!
Jeffrey Dorfman is a professor of economics at The University of Georgia. His last popular press book is an e-book, Ending the Era of the Free Lunch. You can follow him on Twitter @DorfmanJeffrey