How will the economy perform in 2015? In many ways, it’s a lot like the weather. The first guess is that we should expect more of the same from 2014, which is to say a steady improvement. Last year was a turning point for many people as the bottom hit five years ago was finally shaken off. Progress was made overall – it’s really a question of who benefited and who will continue to benefit.
But when putting together an economic forecast for the coming year something stands out that is quite remarkable. There are hardly any trends for 2015 that should not be important in 2016 as well. Understanding why takes Barataria back to the fundamental principles, theories really, that have guided our understanding of the economy and where it is going.
It has been Barataria’s contention since 2008 that we are in the middle of an economic event that is best described as a Depression, as outlined in detail in two separate postings, the second as an update. This appears to have started at the end of 2000, but history may mark it arriving with 9/11. Barataria refers to it as a “Managed Depression” because the systems that are supposed to prevent a repeat of the Great Depression of 1929 largely worked, creating a small recovery by 2006.
Since depression conditions continued, this took the form of a bubble of excess capacity in finance, housing, and commodities, so the management was not perfectly effective. The larger collapse of 2008, seen as early as 2007, finally showed the limits of our ability to manage the economy.
It’s worth noting here that Europe chose austerity over prudent Keynesianism, and should remain in depression longer as a penalty for their decision.
There are many reasons for depressions, but they are a periodic event in history and a part of general business cycle theory. In grander terms, they are known as K-Waves after the first person to chart them, Nikolai Kondratieff. If everything goes according to the pattern the Managed Depression of 2000 should last as long as the previous period of expansion, which was about 17 years – putting an end date around 2017.
Nearly everything converges on 2017, which Barataria has come to refer to as “The Year Everything Changes”. There will be a new President, for sure. It will also be the year that the peak Baby Boom, born 1952-1956, hits 65 years old and starts retiring. And if job gains continue at nothing better than the rate laid down in 2014, we will be at or near a condition of “full employment” – with upward pressure on wages for working families for the first time in 20 years.
The realization that inflation should remain tame through at least 2015, if not longer, only improves this claim. Interest rates should remain historically low even as the economy picks up. What remains lacking right now is faith that good times are coming and attitudes change only slowly – but when they do we can expect credit to shake loose for promising new ventures.
As rosy as this sounds, there is still some downside. A strong US Dollar means corporate profits will be down as income from outside the US is converted into fewer bucks on the bottom line. That will limit the necessary hiring that corporations still have not done to prepare for a genuine boom. The stock market should underperform, or at least cool off considerably as it moves more or less sideways in reaction.
There is also the potential for a widening “skills gap” as the Boomers retire. Education is going to be very important over the next two years, as President Obama has anticipated with his plan for free community / technical college.
What does this all mean for 2015 and beyond? With 2014 as the year in which people started to see improvement they could believe in and 2017 as the year everything changes, the next two years should stand together as the bridge between.
Look for improvement in wages and even booms for certain skill sets. Income inequality should start to improve, at least for the working end of the middle class, but political pressure is only likely to increase on this issue. The wave of retirees will start to strain budgets, but we should first see government budgets improve dramatically and new public spending come, especially in infrastructure.
The Federal deficit will continue to fall and may even turn into surplus, with absolutely everyone taking credit for it.
All of these things are not just trends for this year, but should continue into the next barring some general economic collapse. The politics of the next year should change as much as the economy did in the previous four years, as politics typically lags the economy (and certainly doesn’t lead it). But that is a complex subject for another post.
There are many links to articles on the concepts explained here. If you have questions about the reasoning or think Barataria is just plain wrong, please follow the links for more information. Thanks!