Wednesday, March 07, 2018

Expectations and the Economy

Many people were surprised by the rise in the stock market and increase in economic 
activity immediately  after Donald Trump won the election last year.  

Some of this increased activity began immediately after he was elected and before he took office.  Even 
after  he was sworn in as President people were surprised that the economy began taking off before he 
had time to start making changes.

The fact is that many things in life are based not so much on current circumstances as on people’s 
expectations of what the future portends.  In other words, many people begin acting as if the change 
they are expecting is already here.

Of course, people’s expectations for the future can be negative as well as positive.  If people begin 
believing that times are going to get bad they will begin cutting back economic activity in anticipation 
of the hard times to come.

People are individuals and each individual will base his or her actions on what they expect the future 
to be.  However, individuals’ expectations are influenced by the actions of those around them as well 
by whatever information is driving their expectations.  

In the case of the burst of economic activity that followed President Trump’s election and his taking 
office, those who believed his promises to do things like cut taxes and reduce the regulatory burden 
on business began acting as if these actions were already underway despite the fact Donald Trump 
hadn’t been in office long enough to do much of anything.  As President Trump began reducing 
regulations and began working on tax cuts these people pushed ahead harder while others, seeing 
that changes were occurring jumped on board and began acting as if the changes were already 

Individuals, Not Just Businesses & Investors, Also Act on Expectations

When an individual expects the future to be more uncertain and accompanied by economic 
challenges he or she will react by increasing savings, cutting back on spending and deferring 
things like buying a new house or car, changing jobs, getting married, having children, etc. In other 
words they hunker down and prepare to ride out the expected economic storm.

The opposite occurs when, in the midst of major hardship, individuals believe they are seeing a 
light at the end of the tunnel, they become more confident and start to expand their economic 
activity again.

Barring a major economic set back, I believe that people’s optimism about the economy will 
continue and that we will see more of the millennials, that huge cohort of children that the 1960s 
boomer generation gave birth to in the waning years of  the 20th century (and this generation is
 larger than the boomer generation) move out of their parent’s homes and out of their part-time 
and temporary jobs and into careers in the mainstream economy. With steady and larger incomes 
vast numbers of these young people will begin marrying, having children, buying homes and other 
things resulting in an economic boom similar to the big bursts of economic activity that followed 
the end of World War II in the 1950s and long burst of economic growth launched in the 1980s by 
the Reagan Presidency.

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