The Good, the Bad, and the Potentially Ugly

The sheriff rode into town the other day to speak to a combined meeting of my three TEC groups.  The sheriff, in the persona of economist Brian Beaulieu, didn’t need no “stinking badges.”  His credentials in terms of forecast accuracy and suggested actions in anticipation of turns in the business cycle preceded him across TEC nation.  He began predicting, for example, the recession of 2008…as far back as 2003. 

Here is what he had to say this time. 

The Good.  There are two to four more quarters of positive growth left in the current recovery in the United States.  The Federal Reserve’s QE3 policy will continue to stimulate the economy.  Employment will continue to rise.  The consumer will carry the day once again.  Retail sales will be good for Christmas 2012.  Ho-ho-ho. 

There will be a recession in 2014.  Not a bad one.  And liquidity will not be an issue.  Interest rates will remain low…because Dr. Bernanke said they would.  The bond market will continue to absorb inflationary pressures.  The mother of all price bubbles, however, is festering in the bond market. 

The private sector is doing quite well, thank you.  Beaulieu asked for a show of hands and found almost every TEC member company in the room was making money.  More than half were experiencing record profits.  Most companies are lean and well positioned to survive the downturn in 2014 in reasonably good shape. 

2015, 2016 and 2017 will be good years for the U.S. economy.  Unemployment will continue to be high, however.  Structural unemployment has increased to 6% from 4%.  The Fed’s unemployment target has increased to 7% to 7.5%.   

To Brian Beaulieu, a self-proclaimed, non-normative economist, it didn’t matter who is elected president in November.  The president of the United States has little control over the economy in the first 12 to 18 months of his presidency.  Beaulieu didn’t buy into the argument that businesses were holding off on making profitable investments pending the outcome of an election. 

The Bad.  There will be a serious downturn in the economy in 2018.  According to Beaulieu, there is a 90% probability of a precipitous stock market decline beginning in 2017. 

We will begin to experience systemic inflation over the long term.  Inflation will pay off the nation’s debt.  And QE3 is currently creating global inflation.   

Austerity measures, i.e. decreasing the rate of increase in government spending, will slow the growth in GDP and reign in the economic recovery of 2015, 2016 and 2017.  Austerity hurts. 

While there is no “fiscal cliff” lurking out there in 2013, there will be a slow erosion of GDP growth.  Part of the erosion might be attributed to the expiration of the Bush tax cuts and the potential implementation of sequester-related spending cuts.  Federal spending is projected to rise by $1.7 trillion without sequester cuts between 2013 and 2021. Federal spending increases $1.6 trillion even with these automatic cuts over the same time frame.  Big deal.  Taxes are going to go up either way…through rate increases or deduction limitations.    

The dollar will continue to be the world reserve currency.  Labor costs are projected to increase 15.5% over the next five years in China.  Relatively low political risk in North America combined with relatively low but rising interest rates make capital investment look positive for the United States, Mexico and Canada. 

The bond market is the problem.  The bond market is the big problem.   

To make matters worse, most TEC members agree that bonds are the least understood financial instrument in their prudently invested portfolios.  Beaulieu cautioned against bond funds that will come under price pressure as interest rates increase.  He cautioned against non-tax backed municipal bonds and high yield (junk) bonds.  He worried about the ill-liquidity of bonds at a time when investors needed access to cash.   

The Potentially Ugly.  According to Beaulieu, there will be a depression that begins between 2025 and 2030.  This depression will last for a decade.  Statistically, The Great Depression lasted from 1929 to 1934; although the recovery did not take hold until 1941.  About a decade. 

Beaulieu did not despair on this projection or any other piece of “the Bad” discussed during his presentation.  He repeatedly made his point that this was America.  The people in the room were Americans first; and then, entrepreneurs.  He urged his audience to do what every other generation of entrepreneurs did in good times or bad.  Make your move.  If your company has been around a while and you are dependent on a tired, old product or stagnant market, start something new.  Figure it out. 

If you don’t have the drive or the years left to retirement, sell your business to someone younger who can figure it out.  To Brian Beaulieu, business cycles are business cycles.  Nothing can stop the entrepreneur…except the entrepreneur. 

Brain Beaulieu’s new book, Make Your Move: Change the Way You Look at Your Business and Increase Your Bottom Line, includes a methodology for determining your internal corporate business cycle and prescriptions for dealing with the inevitable ebbs and flows of business.   

Dennis Ellmaurer is a management consultant who works primarily as a TEC chairman, leading three CEO mastermind groups in southeastern Wisconsin.  He can be reached at 414-271-5780 or dennis@globenational.com.