No worries. The ‘economic golden years’ are ahead

Add to that the threat of 25% tariffs on all goods imported from Mexico and Canada, along with another 10% tariff on Chinese goods, and a trade war may be forthcoming. Trade wars always end up hurting both sides.

This data usually indicates that slower economic growth accompanied by rising unemployment and continued rising prices lie ahead. While that may be true in the very short term, the longer-term economic outlook is much different.

In the fourth quarter of last year, economic growth slowed to a 2.3% rate after six months of growth exceeding 3%. The inflation rate, which has declined from the peak of 9.1% in June 2022, fell to 2.4% in September of last year. Since then, inflation has steadily increased to the current 3% rate.

It looks like tough economic times lie ahead. Except……….

While we may see some difficulty in the next couple of months, the longer-term outlook for the second half of this year and well into the future is very hopeful.

Much of this more than four inflation problem was caused by massive increases in government spending. Total annual federal government spending rose by about 50% from 2019 to 2024. Especially since nearly all the increase came from borrowed funds, huge increases in excess demand were created.

At this point, prior administrations would say that government spending must be slowly reduced by taking a scalpel to the cutting process. This administration is taking a chainsaw.

Instead of slowly examining areas where cuts could occur, this administration says that in many areas, we could cut almost all spending. Then, add back what is truly needed and justified. This method, of course, carries risk, but in the end, the result will be a massive decrease in government spending and, hopefully, a balanced budget.

That will reduce inflation.

Still, more of the inflation of the last four years was caused by government actions taken to reduce the supply from traditional energy sources. The reduced supply led to rapidly escalating energy prices, which led to more inflation. Energy, directly and indirectly, impacts nearly 30% of the CPI.

The current administration is acting to vastly increase the supply of energy. While it takes months for that action to impact prices, perhaps as early as the end of the year, energy prices could fall dramatically.
That will reduce inflation.

While the short-term effect of tariffs may cause some upward pressure on prices, in the long term, both Mexico and Canada simply cannot afford these tariffs. Even if the tariff costs are passed along to consumers, the resulting higher prices will decrease demand for those imported products. That could lead to recessions in both Canada and Mexico. Since neither can afford that, better trade agreements leading to the US exporting more goods will result.

That means more economic growth and lower unemployment in the US.

Similarly, the European Union cannot afford for the US to reciprocate and match the tariffs that they charge the US when American goods are sold in Europe. The EU will have to reduce those lopsided tariffs and remove all restrictions that limit the import of American made products.

That will lead to more American produced goods sold in Europe. That means more economic growth in the US.

The current administration is also moving to reduce growth-slowing and unneeded regulations. While there are valid reasons for the government to regulate in some areas, the over-regulated environment today has contributed to higher costs for businesses. That leads to lower or negative profit, which forces companies out of business.

Fewer regulations will mean lower costs, fewer bankruptcies and more new companies. That leads to more economic growth.

Don’t be too concerned about the negative data in the next few months. Once the current administration’s policies are fully implemented, the stage will be set for solid long-term economic growth with low inflation and low unemployment.

For those who are skeptical of that forecast, just remember how well these policies worked from 2017 to 2019. During that period, the US had low inflation, falling unemployment, and the foundation for higher economic growth. (In 2020, the economy was set to grow at a 4% rate before COVID impacted economic activity.)

The current policies being implemented will lead, as advertised, to the “economic golden years.”

Some of the most recent economic data seems to indicate that tough economic times may be coming. GDP growth is slowing. Inflation is rising. Tens of thousands of government workers are losing their jobs. Bankruptcies increased last year. And consumer confidence is falling.

Add to that the threat of 25% tariffs on all goods imported from Mexico and Canada, along with another 10% tariff on Chinese goods, and a trade war may be forthcoming. Trade wars always end up hurting both sides.

This data usually indicates that slower economic growth accompanied by rising unemployment and continued rising prices lie ahead. While that may be true in the very short term, the longer-term economic outlook is much different.

In the fourth quarter of last year, economic growth slowed to a 2.3% rate after six months of growth exceeding 3%. The inflation rate, which has declined from the peak of 9.1% in June 2022, fell to 2.4% in September of last year. Since then, inflation has steadily increased to the current 3% rate.

It looks like tough economic times lie ahead. Except……….

While we may see some difficulty in the next couple of months, the longer-term outlook for the second half of this year and well into the future is very hopeful.

Much of this more than four inflation problem was caused by massive increases in government spending. Total annual federal government spending rose by about 50% from 2019 to 2024. Especially since nearly all the increase came from borrowed funds, huge increases in excess demand were created.

At this point, prior administrations would say that government spending must be slowly reduced by taking a scalpel to the cutting process. This administration is taking a chainsaw.

Instead of slowly examining areas where cuts could occur, this administration says that in many areas, we could cut almost all spending. Then, add back what is truly needed and justified. This method, of course, carries risk, but in the end, the result will be a massive decrease in government spending and, hopefully, a balanced budget.

That will reduce inflation.

Still, more of the inflation of the last four years was caused by government actions taken to reduce the supply from traditional energy sources. The reduced supply led to rapidly escalating energy prices, which led to more inflation. Energy, directly and indirectly, impacts nearly 30% of the CPI.

The current administration is acting to vastly increase the supply of energy. While it takes months for that action to impact prices, perhaps as early as the end of the year, energy prices could fall dramatically.
That will reduce inflation.

While the short-term effect of tariffs may cause some upward pressure on prices, in the long term, both Mexico and Canada simply cannot afford these tariffs. Even if the tariff costs are passed along to consumers, the resulting higher prices will decrease demand for those imported products. That could lead to recessions in both Canada and Mexico. Since neither can afford that, better trade agreements leading to the US exporting more goods will result.

That means more economic growth and lower unemployment in the US.

Similarly, the European Union cannot afford for the US to reciprocate and match the tariffs that they charge the US when American goods are sold in Europe. The EU will have to reduce those lopsided tariffs and remove all restrictions that limit the import of American made products.

That will lead to more American produced goods sold in Europe. That means more economic growth in the US.

The current administration is also moving to reduce growth-slowing and unneeded regulations. While there are valid reasons for the government to regulate in some areas, the over-regulated environment today has contributed to higher costs for businesses. That leads to lower or negative profit, which forces companies out of business.

Fewer regulations will mean lower costs, fewer bankruptcies and more new companies. That leads to more economic growth.

Don’t be too concerned about the negative data in the next few months. Once the current administration’s policies are fully implemented, the stage will be set for solid long-term economic growth with low inflation and low unemployment.

For those who are skeptical of that forecast, just remember how well these policies worked from 2017 to 2019. During that period, the US had low inflation, falling unemployment, and the foundation for higher economic growth. (In 2020, the economy was set to grow at a 4% rate before COVID impacted economic activity.)

The current policies being implemented will lead, as advertised, to the “economic golden years.”

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