Visit with Alan Beaulieu

As a Vistage Chair for several CEO Peer Groups in Southern Florida (Broward and Palm Beach Counties) I recently had the pleasure of receiving economic insights from Alan Beaulieu an economist and principal of the Institute for Trend Research. Alan came to Florida as speaker for my CEO Peer Groups in both Boca Raton and Palm Beach. We tried to arrange some warm sunny Florida weather for Alan but unfortunately he got to experience our recent cold snap! It was a packed two days full of business strategy, advice, and insights we often get from the best speakers who visit our CEO Groups. They are a key to strategic planning and the executive management of all of the CEO Group businesses. Alan specifically addressed our local economy here in Florida then moved on the nation and finally the global state of affairs.

Unlike most economists, Alan Beaulieu is willing to make and live with predictions. He and his brother Brian have a 96% accuracy rate over the past 20 years. When they are off it has been by a few months or a few percentage points. Their predictions are based on several factors that are available to anyone via the internet. They have chosen factors that have a high correlation with economic growth rates for more than 100 years in the US and centuries if applied to Europe. The Factors are:

1. Rate of change in the civilian labor force. (showing growth).
2. US industrial production compared to corporate bond prices. (Industrial production lags bond prices by several quarters. Bond prices began to move up in 2006 and continue with corporate profits high. Industrial production is following and will continue to rise at least through 2013).
3. Non defense economic activity. (three month average turned up several months ago indicating a coming rise in the 12 month average).
4. US industrial production (began moving up in mid 2009 and their forecast projects a continued rise into 2013).
5. US Composite Leading indicators from the Conference Board. This is based on an algorithm containing a soup of factors. (Twelve month line in positive territory in early 2009 and continues to move up).
6. Retail sales excluding automobiles. (3 month average solidly up since early 2009, 12 month average rising since August 2010 and is expected to increase).

Near term we are experiencing slow but sustained and dependable growth. This will continue without the widely touted “double dip” though there will probably be a slight dip in late 2011 according to Alan. 2012 and 2013 into 2014 will show growth. The mid-term shows growth through 2017-2018 where a ten year cyclical recession will likely occur. Looking very long term Alan issues a warning. He believes that if government debt continues to grow the interest cost will drive our economy into deep depression around the year 2030.

While I do not currently see the political will to solve the systemic problems that are driving the deficit I do know there is nothing as certain as change. I do not think our politics here in the US will control many world outcomes. The hot beds of activity that are far more likely to create change for us are in the Middle East. Conflicts there are driven by forces much stronger than our political divides here. We are very vulnerable to energy supply disruptions. Should a disruption occur I believe we would quickly begin to develop alternative sources. To move decisively toward green energy we would also have to address problems in education and credit policy. This would be necessary to develop the talent and funding required. Supply disruption and our resulting decisive moves to develop alternative sources would quickly reduce oil revenues in the mid east with corresponding reductions in funding for terrorism. I believe an energy disruption is likely within 20 years. I think the resulting reordering of our national priorities will prevent a 2030 depression. Note that is my prediction not Alan’s. He did agree that a disruption in oil from the Mid East might have the result I described.

What do Alan’s predictions mean to American families? First, we have considered real estate a primary driver of wealth. In the past, we have experienced rising real estate values and declining interest rates allowing us to “strap” ourselves with real estate purchases secure in the knowledge that rising prices and low interest would be on our side. Clearly that no longer works despite the low interest rates. Because of the credit climate and the large inventory of unsold houses, Alan believes values will not return to 2008 levels (1.5 years after the decline began here in Florida) until 2017.

Alan predicts interest rates will rise over the next 7 to 10 years. This means those of us who own mortgaged property should refinance if necessary to secure fixed rate loans. Families that do not own homes may want to consider buying modest properties where the monthly cost will be affordable while prices are low and interest is low. Buy at fixed rates of interest. Improve the property and plan to own for a long period of time. Most mortgages are now owned by Fannie Mae or Freddie Mac. There are currently some fixed rate federal refinance programs available on first mortgages owned by these agencies.

Taxes will rise over the next ten years. There is no way out of this for anyone. Entitlements will be attacked. Look for employment where funding is not driven by state or federal appropriations. Medicare, Medicaid and Social Security will be trimmed and means limited. Plan to fund retirement with savings or equity growth as Social Security is not enough now and the gap between Social Security payments and the cost of living will only expand.

All that said the American dream is alive because we have freedom to create wealth. According to Alan growth areas in the economy will include plastics, information technology, durable goods of high quality, tourism, temporary staffing and energy efficient automobiles. Food production, medical care and products /services that cater to special markets like aging or Hispanics will be strong. There is a lot of money setting on the sidelines. Households are saving and reducing debt at the rate of 600 billion per year. Banks have plenty of money including at least one trillion beyond required reserves. Private investors have over two trillion in cash waiting for great opportunities. Go out there and start and grow businesses now. As Alan Beaulieu says “it is time to make your move.”