Guilty as charged. That's my response to anyone who accuses me of having spilled too much ink writing about what Janet Yellen might do, has done, and will do now that she has raised the Fed funds rate for the first time in a decade. By way of expiation, here is a look at some less-heralded developments in the American economy that may well determine its performance in 2016 and beyond.
Top of the list for immediate impact is the end of austerity. One effect of political stalemate was a "sequester", something of a freeze on the growth of government spending, a consequence of which was a decline in the federal deficit as a portion of GDP. That freeze has been thawed, largely because Paul Ryan, the new speaker of the House of Representatives, persuaded enough Republican Tea Partiers that compromise is not the first step on the road to perdition, or worse, to involuntary retirement from elected office. The $1.15 trillion budget recently passed satisfies three groups: Republicans because it raises the cap on military spending, the president's team because it increases funding for entitlement programs and funds some of the promises he made at the Paris conclave on global warming, and the corpocracy because their lobbyists were successful in writing in billions of special tax breaks for casinos, real estate developers, and other very special interests. The price of this pause in partisanship is a bipartisan raid on taxpayers' wallets, and a tax code further riddled with favors for the already well-heeled. Lawmakers reached a deal because they were willing to "spend some more money," says Goldman Sachs' Alec Phillips and, he might have added, (1) it's not their money, and (2) they will have to borrow it and swell the deficit.
The effect of this loosening of fiscal policy, however, might in the short-run, at least, give the economy a bit of a stimulus to offset any drag from tighter monetary policy. Estimates are that it will add 0.2 percentage point to GDP, a needed boost because:
* The word "recession" is being heard on Wall Street from, among others, billionaire investor Sam Zell;
* the word "bubble" is being heard in the clubby world of real estate developers;
* the drop in the price of used cars has auto company executives tempering their celebration of this year's boom with worries about 2016;
* existing home sales dropped last month to their lowest level since April 2014, although a shortage of homes for sale and new mortgage rules intended to shorten closing periods did exactly the opposite, explaining part of the fall-off;
* the strong dollar is playing havoc with exporters and profits of multinationals; and
* the government revised its estimate of third-quarter growth from 2.1% to 2.0%, a worry for those who believe in the precision of government estimates of the growth rate in an economy dominated by hard-to-measure services.
Less well-reported than the changes in the stance of both monetary and fiscal policies is the aggregate effect of the merger wave on the structure of the American economy. Anheuser-Busch and SAB Miller have a $106 billion merger brewing, with regulatory approval no certainty since the combination might consign the emerging craft beer industry to the stein of history and leave consumers a decision between only "This Bud's For You" and "It's Miller Time". Small beer compared to the $130 billion combination of DuPont and Dow Chemical, to be followed by a breakup into three specialty companies to avoid regulatory disapproval. And the even larger $160 billion merger of Pfizer and Ireland's Allergan, drug-makers whose combined product line will include Botox and Viagra, essentials for consumers unable to locate the legendary Fountain of Youth. The deal is what is called an inversion, with the smaller Allergan providing the new tax-advantaged home for the combined company, sparking outrage from several politicians, not the least Hillary Clinton, favored to become the next president of the United States and in need of tax revenues to fund her campaign promises, a rather long list most recently extended to include discovering a cure for Alzheimer's.
Other deals include equipment-maker Dell's $67 billion acquisition of data-storage provider EMC, a complex transaction designed to avoid some $10 billion in capital gains taxes, and Royal Dutch Shell's plans to take over troubled BG Group for $60 billion, the largest ever cross-border oil and gas deal. All in all, Dealogic reports $4.7 trillion in deals, for many companies a response to slow growth of their core businesses, the need for scale to compete in a globalized economy, taxes to be avoided, and the lure of the salaries and perks that accompany increased size of the businesses being managed. But promises of synergy, savings, and scale efficiencies are easier to make than to keep if history is any guide. No matter. Successful or not, the latest merger wave – the previous one preceded the 2007 financial crisis – will have transformed entire industries.
As the Paris conference on climate change has transformed the energy sector from a largely market-driven one to one subject to government "guidance". Whether or not nations keep the promises made under the influence of the fine wines their French hosts laid on in abundance is irrelevant. Government policy now dominates the energy business more completely than ever. Investors considering directing capital to a fossil fuels industry now must factor in the risk that at some point during the long lives of such investments, regulations will be put in place that devalue those investments. Meanwhile, investors in otherwise uneconomic renewable sources can take heart from the recent budget deal that extended the subsidies for wind and solar projects. The color of cash is green, now in more ways than one.
Finally, there is the transportation sector. Uber, with a market cap of $62.5 billion, has already taken its toll of the traditional taxicab industry and its lenders, and now has its eye on the delivery of small packages. Its service is so attractive to so-called millennials (roughly, under 35s) who prefer urban living that Uber is a seen as a substitute for car ownership. Add to that a seeming shift of the center of gravity of the auto industry from Detroit and points south to Silicon Valley, where an iCar is being developed, and still another industry could become unrecognizable sooner rather than later.
Meanwhile, one million drones are likely to have been sold as Christmas gifts, familiarizing consumers with a device that can further transform the transport sector by reducing the high cost of covering "the last mile" to their homes. These slightly creepy devices will soon be landing on lawns across America with the latest "free-delivery" parcel from Amazon, transferred from the fleet of 25 cargo planes it seeks to buy or lease. FedEx, the disrupter of the postal system, and UPS, which has invested heavily in meeting Amazon's needs, now must react lest they become the disrupted.
One thing that has not changed is my gratitude for my readers' patience with often arcane discussions of economic developments, and their willingness to speak out when they think I have got it wrong. To all of you, best wishes for a wonderful 2016.