Will the U.S. Economy Collapse in 2018?

How close are we to the next U.S. economic collapse in 2018?

The answer to this question is that we could be quite close. The stock markets are trading at all-time highs, we have large debts outstanding by both the federal government and individual Americans, and there is a lot of uncertainty about President Trump and his administrative team.

We tend to always look at how the past has turned out and never look towards the future. For instance, if the present is going well, then we assume that this trend will continue. If we come out of an economic collapse, then there is a build-up of fear that it may happen again. Why not look at the past, present, and future together to determine whether a financial crisis will occur and proactively be ready?

Taking time to do this now will come with great benefits such as protecting your investment portfolio, managing any debts outstanding, knowing where to look for employment opportunities, or knowing where to start a new business venture. By having more knowledge, a more informed decision can be made.

Today, this article will go through five signs of a U.S economic collapse in 2018.

#1 Growing Government Debt

As of October 31, 2017, the amount of debt is approximately $20.4 trillion. Of course, the goal is to lower that debt from its current balance. However, in 2018, experts predict the overall federal debt will climb to $24.1 trillion. This seems to be the case for the next few years, with debt just piling up with no repayment plans. (Source: “Federal Debt Clock,” USGovernmentDebt.us, last accessed October 31, 2017.)

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Having debt is not always a bad thing in order to grow an economy or invest in the future, but it does need to be paid down at the end of the day. As debt continues to grow, it limits future possible economic growth. One thing is for sure; if the economy slows down, it could also dry up government spending because of having limits on capital.

For instance, when an economy slows, the government normally comes in and starts spending to get the ball rolling. This would include infrastructure, giving tax credits, and rebates. With a large amount of debt held, the federal government may have its hands tied and may not be able to do the things it does to drive up the economy.

Due to the large amount debt held, there are huge interest payments that must be made, which does not help the economy in any way. It is great for investors that have invested in the debt instruments because it contributes to their wealth. However, a large portion of the federal debt is held by foreign countries such as China and Japan; this benefits the Japanese and Chinese economies. This, therefore, leads to money leaving the U.S. and has no contribution to America’s growth.

#2 Stock Markets Trading at All-Time Highs 

The year 2017 was quite a weird year in the stock markets in the U.S.; it seems that almost every week, the market made a new all-time high. For example, in January, the S&P 500 Index was trading at approximately 2,125 points. At the end of October, the index was trading at approximately 2,575 points. In this time period, it would calculate to a 21% gain or 450 points.

The Dow Jones Industrial Average (DJIA) saw a return of 17% over the same period. This is an index that only has blue-chip large-cap companies; huge double-digit returns are not normal.

A major reason why the markets were trading higher in 2017 was because of everything that President Trump promised during his campaign trail. This would include lower taxes on earned income and tax holidays for companies. It has been a year with Donald Trump as the president and nothing has come to fruition.

The tax holidays were supposed to bring billions of dollars from foreign countries into the U.S., which should have resulted in more corporate spending and hiring. There have been rumors of this tax holiday still occurring but a higher tax rate would be applied. This is one of the reasons why companies are trading higher compared to just 10 months ago.

Another reason why the markets are trading higher is because income investors have no choice, resulting in investors taking on more investment risk. This is the case because the money market, savings accounts, and certificates of deposit (CDs) are offering rates that are near zero and below the inflation rate. Therefore, rather than parking money into an investment that pays no returns, investors are taking on more risk through the stock market; this includes retirees, pension plans, and wealthy individuals.

Also, the markets are continuing to trade higher and investors don’t want to miss out on the bullish run. Investment decisions without any research lead to markets being overvalued and stock market bubbles.

Evidence of this style of investing is seen in the price-to-earnings (P/E) ratio. At the end of October of 2017, the P/E was 25.6 times; this would compare to a five-year average P/E ratio of 15.2 times. This would amount to a 68% premium valuation compared to the present P/E ratio. Even when considering a 20-year P/E ratio, there is currently a 48% P/E trading valuation. The markets are quite toppy and it is one warning signal.

#3 The Unemployment Rate

Since the last recession in 2008, the unemployment rate has improved dramatically. For instance, in September of 2009, the unemployment rate was 9.8%. In September of 2017, it is 4.2%. Of course, this is great, because it means a smaller percentage of individuals are unemployed. (Source: “Labor Force Statistics from the Current Population Survey,” Bureau of Labor Statistics, last accessed October 31, 2017.)

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However, when digging into the number, there are a few misconceptions. The first being the percentage of individuals not looking for work. Back in September of 2009, the number of eligible workers looking for work was 65.1%. In September 2017, the participation rate has dropped to 63.1%. (Source: “Labor Force Statistics from the Current Population Survey,” Bureau of Labor Statistics, last accessed October 31, 2017.)

Having a lower participation rate means that fewer individuals are looking for work and will not contribute to the economy. Individuals stop looking for employment due to sickness or disabilities, structural change occurring in the employment picture, becoming a full-time student, or early retirement.

All these factors actually influence the U.S. economy in a negative manner because companies will not be hiring the best talent. For example, when a company looks to hire and is taking in candidates’ resumes, the best of best won’t always be applying. If an individual is getting educated, it means there is a possibility of obtaining skills in a profession that needs fewer skills than previous experiences.

Also, when someone becomes discouraged and is having a hard time finding work, the bird in hand scenario could be looked at. This simply means that people will take the first or second job offered rather than looking for something more suitable. This would occur because the fear of not finding any work is strongly considered. This is one indicator that puts a damper on economic growth.

#4 Unstable Government 

During the campaign trail, Trump promised so much to the people of America such as tax cuts, corporate tax cuts, a better healthcare system, less wasteful spending in the administration, and much more. It seems that President Trump spends more of his time on his Twitter account starting feuds rather than doing his tasks as intended as the president of the United States.

Yes, some of the things Trump promised have seen follow-through, such as less wasteful spending in the federal government. In some cases, his team members earn no salary, such as his daughter, Ivanka Trump, his son-in-law, Jared Kushner, and Reed Cordish, assistant to the president for intergovernmental and technology initiatives. (Source: “White House releases salary info for Trump’s aides,” Politico, June 30, 2017.)

However, even though there are savings for three individuals under the Trump administrative, he is spending in other areas such as security for him and his family. This would include visiting his home in New York or golfing on the weekend in Florida.

Another reason why Trump could cause the economy to collapse in 2018 is because of the instability of him and his team. There have been a number of people that have joined and already left the Trump administrative team. This has occurred because Trump doesn’t get along with the individuals or there has been some wrongdoing that has occurred.

There are countless numbers of actions taken by Trump to show the markets and investors this instability. One example is the tense relationship between Rex Tillerson, the Secretary of State, and Trump. It was like the two were arguing like children in grade school. In the end, nothing really major happened due to Vice President Mike Pence intervening.

Just weeks after the tension with Tillerson and Trump, Paul Manafort surrendered to the FBI  relating to the conspiracy against the United States. Manafort was the former campaign manager of Donald Trump. The charges are related to the involvement of Russia in the 2016 United States Presidential election. There are also charges related to money laundering.

This could lead to a couple of things, with more individuals being involved in this wrongdoing, including people from Trump’s team. Or Trump himself could be linked to having his hand in the interference of the election in 2016. There are so many unknown questions, which is not great for the markets and investors.

The reason why this is one of the reasons for a U.S. economic collapse in 2018 is because it is proven that markets fall when there is uncertainty in the government. One example is when the Spain Catalan dispute occurred the markets fell quickly. The major financial institution saw losses greater than five percent in one day. This is one reason for seeing a U.S. financial crisis in 2018.

#5 Rising National Debt

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Credits:iStock.com/AlexLMX

As of June 30, 2017, the total amount of household debt was $12.8 trillion. This was an increase of $114.0 billion from the previous three-month period. On a comparable basis, the $12.8-trillion debt is 15.1% higher than what it was in 2013 and higher than its peak in 2008 by $164.0 billion. This happens to be right before the financial crash, which saw many American suffering financially.

The largest portion of the debt being held is mortgages balances; this component accounts for $8.6 trillion, which is 67% of the total debt. Balances on home equity lines of credit (HELOC) was standing at $452.0 billion. Also, credit card and auto loans saw an increase of 2.6% and two percent respectively compared to the previous quarter in 2017. (Source: “Center for Microeconomic Data,” Federal Reserve Bank of New York, last accessed October 31, 2017.)

Growing debt is a concern because it means less consumer spending in the economy and more money being spent on debt obligations. Since mortgages account for the bulk of debt, it is a real concern because the last recession was due to the housing market. Another reason this is a major concern in 2018 is because of rising interest rates that have been set by the U.S. Federal Reserve. For instance, from the time period of December 2015 to October 2017 there were four interest rates hikes. It is likely that this interest rate trend continues since rates are near their historic lows.

This is quite concerning from the outside looking in because as interest rates rise, it means the total debt held will be held for a longer time. This is due to the fact that when a payment is made by the borrower of the funds more money will be paid in interest and less in principal. Or some individuals will pay down more towards their debts but this results in less money being available for consumer staples and discretionary items.

Also, since more money is going towards debt, it means that there are fewer dollars going towards retirement and savings plans. This will impact the use of government programs in the future if there is not enough capital to fund the retirement or there will be retirement.

In the end, the American banks benefit from sums of debt by consumers because of the spread on interest rates. However, if consumers stop paying their loans, it could lead to a credit bubble and the next U.S. economic collapse in 2018.

Source: http://www.lombardiletter.com

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