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Wall of Optimism Cracking? IMF Lowers US Economic Growth Forecast

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Over the last several years, mainstream analysts have built a wall of optimism about the US economy. “Everything looks great,” they say. “Look at the jobs numbers!” “Look at the stock market!”

A number of contrarians have said things aren’t so great and a massive crash is on the horizon. The mainstream has pretty much ignored the naysayers. But a recent report by the International Monetary Fund shows some cracks in the wall of mainstream optimism. And in the current political climate, it may not take much to cause the wall to crumble down.

The recent collapse of Republican efforts to reform healthcare has rekindled doubts about Trump’s ability to push through his ambitious economic agenda. The real concern is if enough people lose faith in the Republican’s ability to fix healthcare, reform the tax system, and pass a significant infrastructure spending bill, it will prick the stock market bubble and set off a crash.

It seems we’re beginning to see signs of doubt. On Monday, the IMF released its World Economic Outlook, featuring a downward revision in the economic growth forecast for the United States. The IMF estimated US growth at 2.1% both this year and next. In the April World Economic Outlook, it had forecast US growth of 2.3% in 2017 and 2.5% in 2018.

The downward revision reflected analysts the IMF released in late June during its annual assessment of the US economy.

The IMF said fiscal policy was one factor in its decision to revise US growth downward.

US growth projections are lower than in April, primarily reflecting the assumption that fiscal policy will be less expansionary going forward than previously anticipated.”

During congressional testimony earlier this month, Janet Yellen hinted that we may be close to the end of the interest rate tightening cycle. She expressed concern about inflation not hitting the 2% target and talked about being close to the the mythical “neutral interest rate.” But one has to wonder if the central bankers also worry the economy isn’t as good as they advertise publicly, and they know there’s not much the administration can do about it.

That certainly seems to be a worry at the IMF. According to Bloomberg, lack of faith in Republican plans was also a factor in their growth forecast revision.

In June, the IMF said it had dropped assumptions of a boost to growth from Trump’s plans to cut taxes and increase infrastructure spending. Trump’s budget director, Mick Mulvaney, wrote in July that the administration’s goal is ‘sustained 3% economic growth,” and he named the program ‘MAGAnomics’ after Trump’s campaign slogan, ‘Make America Great Again.'”

Looking at things from a broader perspective, the IMF expects the global economy to expand at 3.5% this year. Again from Bloomberg:

The drivers of the recovery are shifting, with the world relying less than expected on the US and UK and more on China, Japan, the euro zone, and Canada … The dollar fell to its lowest in 14 months last week as investors discounted the ability of President Donald Trump’s administration to deliver on its economic agenda after efforts by the Republican Senate to overhaul health care collapsed.”

That brings us back to Trump.

Stocks have continued to climb higher in the wake of the president’s election. Many people believed he would usher in healthcare reform, tax reform, regulatory reform, and provide a dose of economic stimulus in the form of infrastructure spending. Many analysts dubbed the stock market climb based on this optimism the “Trump Bump.” But Peter Schiff recently called it “false optimism.” With the glaring dysfunction in D.C., Peter appears to be right.

I think there’s too much false optimism out there on the part of people who voted for Trump … I think a lot of people actually believe this is a game-changer, that he’s going to drain the swamp, that he’s going to solve all the problems, and people are now optimistic. Unfortunately, none of this is true. Nothing that Trump is likely to do is going to make any difference as far as the course we are on.”

Could the IMF’s growing lack of confidence in the US economy be a crack in the wall of optimism? Will the markets begin to figure it out? Could the bursting bubble and ensuing crash be on the horizon? That remains to be seen. But it certainly makes sense to be prepared.

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