Prepare Yourself for an Economic Boom Ahead

Call me optimistic, but I suspect we are headed for an economic boom like we haven’t seen in decades. Some of you may have read Harry S. Dent, Jr.’s book written in 1993 called The Great Boom Ahead where he forecasted a “spending wave” paralleling an accelerated birth rate that in turn would create an unprecedented economic boom. We know now that he was wrong, or at least off by a decade or two. But I really think he was on the right track.

I’m going to stick my neck out and forecast an economic boom starting in 3-5 years.

All of the charts and statistics I’ve been studying show we are moving in the right direction.  Many of the negative statistics we’ve been hearing for the last couple of years seem to be approaching bottom and making a turn for the better. Numbers such as high unemployment and personal debt have peaked and appear to be reversing. Let me share a summary of what I’ve learned.

Personal debt
Personal debt has peaked and is headed back down. We have a long way to go yet, but consumers are paying off their debt, and previously unaffordable mortgages are being restructured.

Source: Federal Reserve and Bureau of Economic Analysis, as of 11/6/2012

Tax revenues will increase
Whether our elected officials increase tax rates or eliminate deductions, tax revenues will increase. This will be actually be good for the economy as it will reduce the federal deficit and avoid a future economic disaster.

Medical costs increases will be slowed through efficiency and competition
Regardless of what you think about Obamacare, many of its’ features will likely slow down the cost spending on health care. A January 2012 article in the journal Health Affairs reported that “U.S. health spending grew more slowly in 2009 and 2010 than in any other years during the fifty-one-year history of the National Health Expenditure Accounts.”  The Henry J. Kaiser Foundation’s research group, Health Research & Educational Trust (HRET), conducted its annual employer survey and found that premiums for employer-sponsored health coverage rose only 4% during 2012. They said Obamacare is doing what it was designed to do…slow down and eventually reduce the cost of health care for more Americans.

College cost increases will be slowed
I predict that tuition and fees will soon outpace the ability for students and their parents to get a four-year degree. Simple economics (supply and demand) indicate that this cannot continue. The National Association of Independent Colleges and Universities found that private colleges and universities increased tuition 3.9 percent this fall, a rate well above overall inflation but the smallest increase in at least four decades, and substantially lower than prices have been rising at public universities.

Consolidation of retail 
Remember all of the electronic stores we had 10 years ago? Now it seems we just have Best Buy and Apple stores. Sure, it makes for less competition in the brick and mortar space, but now we have the ability to purchase these items online. The competition and efficiency in the online marketplace will continue to keep productivity up and prices low.

Alternative energy and oil inventories
Oil inventories are higher than they’ve been in decades, and more alternative sources of energy are coming online every day. The price of energy should remain relatively stable for the foreseeable future.

Effective regulation
The lack of adequate regulation of mortgages led to people buying, then losing homes they couldn’t afford, and the lack of regulation on Wall Street led to a financial crash from which we are still recovering. Regulation can be a burden to small business, destroy initiative, and hold businesses back from reaching their true potential. But much of the proposed regulation will benefit the consumer and provide some protection against another near collapse. Slower and more cautious economic growth will lead to more careful, solid and sustainable growth.

Entitlements issues will be resolved (for a while)
This will be one of the more difficult issues to get resolved, but I’m confident that the short-term problems with Medicare will be resolved in the next couple of years. The likely solution will only push the problems out another generation or two, but it will provide the time necessary for a more permanent solution.

Corporations will free up the cash they’ve been hoarding
Corporate balance sheets as a whole look solid, and many are flush with cash waiting for the government to make some firm commitments. Once they feel confident they will quickly put their cash to work buying new equipment and hiring employees.

 

 

 

 

 

 

 

 

 

 

More employment
Unemployment is trending down. Although it will be some time before we get unemployment down to a reasonable level, as people regain employment, their spending will increase proportionately.

 

 

 

 

 

 

 

 

 

 

 

 

Pent-up demand
Consumers as well as businesses are unsure of the economy and its long-term stability.  There is a tremendous pent-up demand for durable goods. Once they regain confidence, spending will accelerate. You can see it in the auto industry and the beginning signs of it in housing.

 

 

 

Housing turnaround 
Actually, we will likely see a “housing shortage” in the next 24 months as housing starts are nowhere near the projected demand.

 

 

 

 

 

 

 

 

 

 

Consumer sentiment
Consumers are feeling better about the economy. That, along with low interest rates, will start releasing some of the pent-up demand indicated above.

President Obama is in his second term
This is important because he can stand up to his base since he’s not worried about getting reelected. This will be central to any kind of “Grand Bargain”, including some entitlement reform, to go along with his proposed revenue increases.

Low interest rates
The Federal Reserve has no intention of increasing interest rates for the next year or two. This keeps borrowing costs low for consumers and businesses. To stimulate the economy, Ben Bernanke, in the September 2012 Federal Open Market Committee (FOMC) meeting, said the Federal Reserve expects to keep interest rates low through mid-2015 by pumping $40 billion into the economy each month. And just this month the 30 year mortgage rate hit a record low.

Emerging market economies
Emerging market countries like China have growth rates north of 8% per year. As their economies continue to develop, they will become major drivers of the world economy, and I see no reason for this to change anytime soon.

 

 

 

 

 

 

 

 

 

 

 

US and Euro financial conditions
The economy in the US and Euro countries have a long way to go to get back to optimal, but the trend is up.

Finally, the war in Afghanistan will end
The pulling out of most of our troops in 2014 will save billions of dollars. The cost is expected to be over $88 billion in 2013. But we will need to find employment for the soldiers when they return.

Maybe I have convinced you, maybe not. But assuming I am correct, you might ask “what are some signs that the boom is starting?” Here is a short list of things I would watch out for:

  • Unemployment dropping below 6%
  • Real GDP increasing to 4%
  • Interest rates starting to rise
  • Housing starts above 1,200,000

I’ve painted a pretty rosy picture. But short of an unforeseen natural disaster, or our involvement in another war, I’m confident that things will improve.

 

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