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Buy cheap now, despite rocky future, economist advises

The local and national economies will likely hit a slowdown or dip next year, as federal cutbacks and rising interest and inflation rates put the brakes on the recovery, economist Alan Beaulieu warned at a seminar Thursday sponsored by the San Diego Regional Economic Development Corp.

But the economy will strongly rebound from 2015 through 2018, so forward-looking companies should start hiring employees and investing in new equipment and facilities over the next 15 to 18 months to prepare for the boom, said Beaulieu, president of the ITR Economics, senior economic adviser to the National Association of Wholesaler-Distributors and contributing editor to Industry Week.

The leading indicators are all pointing up through the end of 2013, Beaulieu said. Companies are hiring, banks are lending, corporate liquidity is not an issue, retail sales are rebounding, the Federal Reserve’s stimulus spending has not yet come to a halt and new discoveries of oil in the upper Midwest are helping the United States regain its energy independence, which also seems to be helping the country stanch its long-running decline in manufacturing.

On the other hand, he said, the nation is now primed for a growth of inflation and interest rates, which it hasn’t experienced in three decades.

“Interest rates will be going up 400 basis points in the near future, which will push mortgage rates up to their historical norm of 7.5 percent to 8 percent,” Beaulieu said. “Older folks might remember what that feels like, but younger people might want to look for old textbooks or talk to older people to see how to plan for it, because we really haven’t been in that situation since the 1970s.”

Beaulieu said rising interest rates could throw the recent rise in home prices into reverse, which would have a rippling effect on home building, construction jobs and retail spending, slowing down the entire economy.

At the same time, the size of the federal budget sequester, which put a dent in the economy this year, will double in size from around 6 percent of discretionary spending this year to 2014 next year, which will also slow the economy.

With those changes in the offing, Beaulieu projects a major stock market correction of up to 16 percent between now and October. “If you’re close to retirement and need that money soon, you might want to consider repositioning your assets,” he said.

But he stressed that even though many employers may be forced to cut back next year, the rise in inflation may open the door for others to expand their facilities or workforce.

“You can borrow now at relatively low rates and pay the loans back later with inflated dollars, which makes borrowing cheaper at both ends,” he said. “And banks are willing to loan now. How much money? So much money that you won’t be able to sleep at night.”

But that isn’t the end of the story. Partly because of dramatically changing demographics — for the first time in its history the U.S. now has more people above the age of 55 than below the age of 18 — the U.S. will face severe economic challenges between 2019 and 2035, as baby boomers leave the work force and depend on Social Security and Medicare.

That shift — coupled with other structural changes in the economy — could lead to even worse problems than the country has experienced so far.

Beaulieu’s prescription: Make as much money as you can in the coming mini-boom after 2014 so you can stock up for the next plunge.

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