You can't go online these days without reading dire predictions about America's demise.
They range from a coming economic collapse and Great Depression to a 50% sell-off in the stock market. In most cases, the blame is placed on the Federal Reserve's policy of cheap money, enacted after the financial crisis.
The forecasters are sometimes people who are selling something – a report or video – telling you how to protect yourself or even profit from the coming calamity. Sometimes the warnings come from former politicians. In some cases, the forecasters have a strong political point of view.
So what is a consumer to think when the stock market has been volatile and the economy weak? Is the end really near?
We decided to ask a mainstream economist who monitors economic data on a regular basis. Joel Naroff, of Naroff Economic Advisors, says as things now stand, the U.S. domestic-related economy is just fine.
“Consumers are spending, firms that supply into the U.S. based economy are generally doing well and with wages rising and energy costs low, consumption should remain solid for all of 2016,” Naroff told ConsumerAffairs.
CA: Why does the economy seem to be so sluggish?
NAROFF: The slowdown is being caused primarily by the collapse in energy costs. Consumers are only slowly spending the added free cash but the energy companies have reacted much more quickly. They are laying off workers, slowing job growth. They have cut back investment activities, reducing orders and demand for all the companies that supply capital goods, operating products and services that are suppliers to the industry.
So investment is down as is manufacturing for those firms providing capital products. But the price of energy has stabilized and the energy industry is moderating its cut backs.
What about China?
CA: Some of the sense of unease seems to be be related to China. Is China in trouble?
NAROFF: Whether China is slowing sharply or the data are just catching up with the reality, is something we just don’t know. When you have as big an economy as is China’s, it is almost impossible to sustain 7%-9% annual growth. China will be throttling back to 5% and lower over the next few years. Thus, for there to be a catastrophe, certain things have to happen.”
CA: Like what?
NAROFF: “The price of oil has to fall sharply once again, basically crashing the elements of the energy sector that have been able to survive the fall to $40-$50. Is that likely? It doesn’t look like it. Second, Chinese growth has to not just slow, but probably flatline. Think of it this way, if China grew at a 5% pace, nominal GDP would expand by over $500 billion.
That would power an awful lot of purchases from the rest of the world. That would also be equivalent to about a nearly 8% rise in the Chinese economy just five years ago. In other words, on a nominal dollar basis, China is still growing strongly.
It is just the percentage change off of a really higher base that is confusing people. And in any event, the U.S. economy doesn’t depend upon China to buy much of its output. Exports to China will probably run about 0.6% of total GDP this year. Thus, even a 10% or 20% reduction in exports would have little direct effect. The rest of the world might be hurt more, but that makes it a secondary effect for the U.S."
We aren't without problems
CA: Well, are there economic problems facing the U.S.?
NAROFF: The primary problem is financial. Since corporate earnings growth has been powered by sharp gains outside the U.S., the slowdown in China would depress earnings. But those are earnings made in foreign markets and we shouldn’t be concerned about them. Similarly, earnings reductions that are due to the strong dollar, not a slowdown in sales, is also totally irrelevant when it comes to the U.S. economy.
CA: So, are we headed for an economic calamity?
NAROFF: I never say never, but right now, the probability is pretty low.