Prediction: Our 2018 Predictions Will Be More Accurate than Paul Krugman’s

Prediction: Our 2018 Predictions Will Be More Accurate than Paul Krugman’s

We could make bold predictions about the coming year, recognizing that we probably will not be taken to account a year from now if the predictions aren’t true. People don’t have long memories.

However, bold predictions are sometimes irresponsible. Consider what economist Paul Krugman had to say a year ago in The New York Times: “It really does now look like President Donald J. Trump, and markets are plunging. When might we expect them to recover? … (A) first-pass answer is never.”

Calling President Trump “an irresponsible, ignorant man who takes his advice from all the wrong people,” Krugman suggested that, although Trump would ruin the economy as well as financial markets, “the economic ramifications are way down my list of things to fear.”

It turns out, though, that Krugman was the one being “irresponsible.” Anyone who read his column and decided to pull out of the stock market missed out on a banner year, as the Dow Jones Industrial Average finished the year up more than 25%.

And, rather than being manipulated by the Federal Reserve Board, the market rose in response to higher corporate profits and stronger economic growth. After eight years in which the economy grew by an average rate of about 2%, economic growth has exceeded 3% since the second quarter of 2017. Gross domestic product grew 3.1% in the third quarter and 3.2% in the fourth quarter. Figures are not available yet for the fourth quarter, but the average forecast predicts 3.3% growth.

For his reckless prediction, which was unsupported by facts, Krugman has been justifiably taken to task … although he still retains his gig with The New York Times. Among his detractors were The Washington Times, The Daily Caller, Fox News, RealClear Politics, TownHall, Reddit and Canada Free Press.

We’re glad that Krugman was wrong. And we’re glad that President Trump doesn’t take his advice from Krugman.

What to Expect in 2018

We can’t do any worse than Krugman, who is a Nobel Prize winning economist, so here are a few of our predictions for 2018:

The stock market will continue to perform well. We’re in the second longest bull market ever. Assuming it’s still with us in March, it will turn nine years old. At 3,285 days, it will still be short of the record.

Stocks are currently very overvalued, but we expect the bull to continue charging through most if not all of 2018, with a few setbacks along the way. Catalysts will include stronger economic growth, continued deregulation and implementation of tax reform.

One caveat: protectionist trade policy, if implemented, could mean the end of the bull.

Economic growth will exceed Fed forecasts. This is pretty much a given, as the Fed forecast growth of 1.8% for 2018. As noted above, the economy has begun to string together consecutive quarters of 3% growth. Expecting continued growth at that level is not setting the bar too high, as growth averaged 3.3% from World War up to the financial crisis of 2007.

Interestingly, throughout the Obama administration, the Fed’s growth forecasts were overly optimistic. Now, they appear to be overly pessimistic.

Interest rates will rise. This is a no-risk prediction, as the Fed has already forecasted that it plans to boost rates three times in 2018. A growing economy and the Fed’s decision to scale back its $4.5 trillion portfolio will also contribute to an upward trend for interest rates.

Bitcoin’s bubble will burst. Bitcoin started 2016 at a price well below $1,000. In December, its price escalated to $19,000. Before the year ended, it dropped as low as $11,000 before shooting back up to just over $14,000 as the year ended.

Often, when an asset performs spectacularly one year, it tanks the following year. Bitcoin’s appreciation in 2017 may be unmatched by any other asset in history, so it’s pretty safe to predict that the price will fall in 2018. Increased competition from other cryptocurrencies, as well as action by some governments to prevent its operation, will likely contribute to its fall.

Consumer income will rise. For the eight-year period after the Great Recession, average personal income remained lower than it was before the Great Recession. Recently, though, wages began to rise again.

While the unemployment rate is officially 4.1%, it’s 3% or even lower in some metropolitan areas, according to The Wall Street Journal. Wages nationally increased about 2% in 2017, but in Minneapolis, for example, they increased by 4%.

We’ve frequently noted that the U-6 unemployment rate is more important than the commonly reported U-3 rate, as it considers people who have given up looking for work as well as part-timers as being unemployed. The U-6 rate has dropped from double digits to 8%, indicating that many people have returned to the labor force or have made the transition from part-time to full-time work.

One expected impact of tax reform is that lower corporate taxes will free up funds that corporations can you to increase wages. Likewise, deregulation should increase productivity and make more money available for businesses to spend on wages.

Consumer spending will rise. Consumers will have more money in their pockets as a result of tax reform and, if my prediction is correct, from higher wages. As a result, consumers will spend more, which will also help to boost economic growth.

Our predictions for 2018 will be more accurate than Paul Krugman’s. This is a no-risk prediction. Perhaps because he was so wrong last year, he made no predictions this year, per se. He did, however, post a Christmas day op-ed titled, “America Is Not Yet Lost.”

Among his gems: “The U.S. may yet become another Turkey or Hungary — a state that preserves the forms of democracy but has become an authoritarian regime in practice. But it won’t happen as easily or as quickly as many of us had feared.”

A final prediction for 2018: Krugman and other Keynesians will continue to be wrong about the economy. That’s another no-risk prediction.

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