Sweeping changes to take time to work; trade-war threat a worry
The U.S. is steering toward the start of a Trump administration at a tepid 2% pace of growth, but hardly anyone expects the new president with ambitious plans to “make America great again” to get the economy to sizzle right away.
How come? In a word, uncertainty. Donald Trump has espoused a number of loose goals such as tax cuts, reduced regulation, higher defense spending, the end of Obamacare and more concessions from trading partners such as China and Mexico. Yet he’s offered very few details about how and when he’ll achieve these goals.
“There is too much that is just unknown yet,” said Colin Moore, global chief investment officer at Columbia Threadneedle Investments.
That hasn’t stopped investors from piling into stocks after Trump pulled off a stunning upset to defeat Hillary Clinton. The Dow Jones industrial average hit a record in the wake of the vote. Many expect Trump to follow through quickly and give a shot in the arm to key sectors of the economy.
The broad parameters are set.
With Republicans set to control all of Washington, tax cuts are clearly in the cards. In his victory speech, Trump also repeated his goal to spend more on major transportation projects such as roads, bridges, airports and the like. To senior economist Jennifer Lee of BMO Capital Markets, it sounded as if the president elect is prepared to engage in “Keynesian-like spending.”
“Taxes are going down and spending is going up and that will be stimulative once it is enacted and implemented,” Chris Varvares and Joel Prakken of Macroeconomic Advisors concurred in a report.
How much stimulus won’t be known for several months at the earliest. Trump doesn’t take office until Jan. 20 and it usually takes Congress at least a few months to craft far-reaching bills. Even if taxes are cut or spending is increased, the money won’t start to flow into the economy until late spring or early summer.
Some conservatives in Congress might also be reluctant to get fully on board, especially deficit hawks.
The nation’s budget deficit in fiscal 2016 — how much government spending exceeded tax revenue — surged 34% to $587 billion to mark a three-year high. The national debt has climbed to nearly $20 trillion, almost double what it was a decade ago.
“Infrastructure appears to be a focus for Mr. Trump but some congressional Republicans appear less enthusiastic,” noted analysts at Goldman Sachs.
Not all of President-elect Trump’s big ideas are viewed as rocket boosters for the economy, either.
Wall Street and big business, for one thing, are anxious about Trump’s threat to tear up free-trade agreements and potentially ignite a trade war that could cost countless American jobs and depress growth. The U.S. economy is more dependent than ever on trade.
Bank of America Merrill Lynch cut its already lukewarm estimate for U.S. growth in the first six months of 2017 on the belief that trade restrictions adopted by a Trump administration will outweigh an increase in government spending. Other Wall Street firms have made a similar calculation.
Will Trump actually follow through? He’s sent mixed signals but has indicated room for flexibility, easing the concerns of some investors.
A wild card is the Federal Reserve. Some analysts think the Fed could back off plans to raise interest rates several times in 2017 until it gains more clarity on how Trump’s agenda influences the economy.
Yet Jeffrey Lacker, head of the Richmond Fed and a noted policy hawk, said extra federal spending could spur the Fed to undertake more interest-rate increases to prevent the economy from overheating. Higher rates curb economic growth.
The good news for the Trump administration is the financial condition of the average household — the main driver of the economy — is in the best shape in years. Companies have created millions of new jobs, incomes are rising, debts are falling, interest rates are low and gas is cheap.
Millions of Americans who helped put Trump in the White House may not be doing great, but many are better of than they were several years ago.
“U.S. consumers are on firmer financial footing than has been the case for some time,” said Richard Moody, chief economist of Regions Financial Bank.
In the immediate term, that could result in a better-than-expected holiday shopping season that’s just getting underway. In October, retail sales are likely to rise a healthy 0.6%, according to economists polled by MarketWatch.The October report will be issued on Tuesday.
Solid gains are also expected in November and December, though sales figures might not show it if retailers discount heavily.