2/6/2013 12:57:00 PM Headwinds, hazards and hurdles
Brad Blackburn Headwinds, hazards and hurdles
Remember when I was absolutely convinced that the combination of the elections, the Fiscal Cliff and our broken government would stifle the economy and stock market at least a little bit? I was totally kidding about all that. If you ever believed that I ever believed such an unbelievable sham, the joke is on you.
Yes, the economy continues to plug along. I've never been so happy to be wrong. To explain the relative economic resiliency we've witnessed, I've coined a catchy phrase: Certain Uncertainty. We have officially accepted that this is as good as it's going to get. Our government is simply not capable of doing what is necessary for our economy to flourish like it should. However, that doesn't mean it can't still flourish. There's money to be made, jobs to be created, homes to be sold and millions of people all over the world for us to sell stuff to. We aren't waiting anymore.
While I've been preaching about an economic recovery for months and months, now that more and more people seem to agree with me, I'm getting nervous... so let's tap the breaks a little. If you expect booming economic growth, you're going to be disappointed. The coming months and years aren't likely to be smooth sailing. Here are just a few of the speed bumps we'll encounter along the way.
The Payroll tax cut: Yes, payroll taxes (which are meant to fund Medicare and Social Security) merely reverted back to where they've been in the past. But, it's still a significant step back. In the coming weeks, millions of people will see 2% smaller paychecks. Bloomberg projects that this will take a whopping $120 billion out of the economy. Let's bring it down to the household level. A person making $50,000 a year will take home $1,000 less than they did last year. That's a whole lot of stuff that won't get bought - which will hurt our growth.
Government spending, taxes and the debt: Our "leaders" in DC are currently attempting to come to a way to avoid the dreaded Sequester (large government spending cuts). However, no matter how it eventually plays out, it will likely hurt our economy over the short-term. As of March 1st, the Sequester will cut approximately 10% across huge swaths of the federal budget. That means defense, as well as other "discretionary" spending like public safety, the EPA, education, social services and more. However, Social Security and Medicaid won't see any cuts, and Medicare will only be cut by 2%.
Should this go through, it will take a huge chunk out of our economy. However, there's always a chance that our politicians will strike a deal to avoid some of the cuts. But even that will be a temporary fix. Our debt is simply not sustainable. In a perfect world, we'll pay it down slowly with increased tax revenues from a booming economy. However, even in that unlikely scenario, it will slow our growth. Whether it's lower government spending, higher taxes, a debt crisis similar to what Europe is going through -- or a combination of all three, our economy is going to pay some sort of price over the coming years.
Goodbye Uncle Fed: Since the "great recession," the Fed has been doing everything but cartwheels and somersaults in order to keep interest rates low and spur on the economy. Even the most optimistic among us have to admit that there is likely to be a dark side to all that activity. I'll talk about inflation and rising interest rates below, but for now I want to point out that it's just a matter of time until the economy will be forced to wean itself off the "medicine" of low interest rates. Ideally, the Fed will gradually back away from the massive stimulus they've provided. However, even then, the markets and the economy won't be happy about it.
Inflation & Interest rates
One result of all the heavy lifting the Fed has done over the past five years is likely to be inflation. One reason the Fed has been so aggressive is that inflation has been low. However, that can change very quickly. Modest inflation isn't a terrible thing, but anything more than that could be. At the first signs of increasing inflation, the Fed will probably have to raise interest rates in an effort to calm things down. While that might work to slow inflation, it will cause its own problems. We've become pretty comfortable with record low rates. What will happen to the housing market if mortgage rates go up? What about all our credit card debt? How will we pay for our government debt when rates go up? Every penny of our debt will become more burdensome once interest rates rise.
I haven't even touched on Europe or the mess brewing in the Middle East. However, if you are waiting for a time when there are no worries about the future, you'll be waiting a long, long time. Even with all these headwinds, I believe our future is somewhat bright. But, for all the reasons I've outlined above, it won't be smooth sailing. Over the last five years, the stock markets have nearly doubled. A repeat performance isn't likely over the next five years. In fact, I'd be surprised if we see anything more than merely decent stock market returns in the coming years. However, given that over the last 13 years, the S&P 500 has essentially been flat, I'll find a way to be happy with merely decent.
Brad Blackburn, CFP®, is the owner of Blackburn Financial, Registered Investment Advisor. Blackburn Financial is located at 121 Cottage Ave, Cashmere. He can be reached at 509-782-2600 or email him at email@example.com