A Look Ahead to 2015

Published December 2014

I’ve spent more time listening to Harry Caray, the Chicago Cubs’ legendary broadcaster, than is recommended for a well-balanced life. Years after his death, I still find myself chuckling as situations arise that would no doubt elicit one of his unique sayings.

One of my favorites occurred whenever the opposing team was mounting a rally and a certified Cubs-killer was stepping to the plate. “There’s danger here, Cherie,” Harry would warn … as if any experienced Cubs fan needed to be reminded. I believe that warning is appropriate for the economy as we enter 2015.

A year ago I observed that Europe appeared to be in the early stages of recovery. Today, the opposite is occurring. The export driven German economy is being hurt by slowing growth in China and non-existent growth in Japan. Greece’s debt to GDP ratio is setting new highs after brief but dramatic improvement. In short, no long term resolution to the challenges facing Europe has emerged.

My concerns are heightened by the fact that so many major economies have used, are using, or are planning to use unconventional and untested instruments to promote growth. Short term results have been mixed at best. Long term implications are anyone’s guess.

Theories are emerging that money injected into the economy is utilized differently today than in the past. While corporations once used cheap credit to expand their operations and hire more workers, today they are more likely to buy back stock or purchase more capacity through automation rather than labor. Global capacity exceeds demand for many products and, unlike the past, injecting money into the system no longer increases demand as effectively as it once did.

The U.S. economy continues to gain its legs following the Great Recession. It’s worth noting that we’re over 65 months into the current expansion, exceeding the 59-month average for postwar expansions. It perhaps doesn’t seem that long because the recession was so deep and the expansion has been very gradual. Many facets of the economy are just now reaching their pre-recession levels. That slow, steady climb may result in a much more enduring expansion.

2015 will almost certainly be a challenging year for U.S. exporters due to the combination of slow global growth and a stronger dollar making our products more expensive for foreign buyers in their local currencies. That will be somewhat offset by U.S. manufacturers being more competitive due to lower energy costs resulting from the shale oil and natural gas booms.

U.S. consumers will also divert a good portion of their savings at the gas pump into other areas of the domestic economy but with more restraint than prior to the recession. That’s significant since consumers account for roughly two-thirds of our GDP.

Perhaps the biggest risk to continued domestic growth is a shock resulting from growing extremism in the Middle East (i.e. Islamic State) permeating our borders or a worldwide panic from the Ebola virus. Although chances for either scenario seem low, they are much higher than a year ago.

In Iowa, my concerns with the agricultural equipment market of a year ago are playing out. I perceived that too many agricultural equipment purchases were triggered by tax incentives rather than true need. Meddling with incentives typically only changes the timing of durable goods purchases, not the overall number.

Experience from “Cash for Clunkers” and the first time home buyer’s tax credit of 2009-10 demonstrates that. Consumers don’t purchase an extra car or house because of the program; they may be prompted to purchase a few months earlier than originally planned. As the program expires, the temporary boost it provided becomes a drag.

That appears to be the case with farm equipment. Farmers are deciding that, although not as sexy as the new unit on the dealer’s lot, their three-year-old combine will get the crop out of the field just fine. Coupled with falling crop prices due to record yields, lower oil prices and slowing global growth, 2015 will not be kind to the ag equipment market.

A lot of recent talk and literature assumes that the expansion is all but guaranteed for another three to five years. While we may be becoming comfortable, perhaps even confident, in the slow but steady growth of the past five years, now is not the time to become complacent.

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