In light of Donald Trump’s win and the GOP hold of all three branches of government, the question on most minds today is, what is the outlook for the US economy? My short answer is that it is too early to tell. At Astor, our philosophy is to be guided by actual economic data rather than forecasts. Nevertheless, it is important to think about possible implications for the U.S. economy.
The economy came into the election on an extremely stable path. Our Astor Economic Index®– a proprietary index that evaluates selected employment and output trends in an effort to gauge the current pace of US economic growth–has been steadily showing modest, but positive, growth all year. Indeed, it has been in an unusually narrow range recently suggesting to us that fundamental dynamics of the US economy are stable.
In the next days to weeks the heightened uncertainty caused by both the unexpected outcome and the unknown policies of a Trump presidency seem likely and the stock market tends to dislike uncertainty.
The nontraditional nature of Trump’s campaign means that there are few coherent, detailed policy commitments to game out. Trump has held a variety of opinions on most matters and will have to work with Congress, which may feel emboldened by his political inexperience.
Discontent over the US trade position has been Trump’s consistent theme. Much trade power has been focused in the executive branch, leaving the new President some leeway to act without Congress, subject to court review over an extended period of time. Given what Trump has said about his negotiating style, it would not be surprising to certainly see some eye-catching headlines about withdrawing from NAFTA. Trump has repeatedly called for a 35% tariff on Mexico and 45% on China, which he may be able to impose at least for a few years unilaterally. This will reduce trade broadly and disrupt international supply chains.
For more on Trump’s views on trade see this article from the Peterson Institute. The authors point out that using standard economic models, a full trade war (where the US raises tariffs on other countries that can then retaliate in kind) could on its own cause GDP growth to be as much as 2.9 percent lower per year for several years. his same paper estimates that an aborted trade war, which they operationalize by saying tariffs are imposed only for year before reverting to previous levels, could have a small stimulative effect on the economy. The future may be somewhere in between.
In my opinion, the reality of substantively reduced trade would likely also be a weaker dollar and higher inflation in the medium term in addition to lower GDP growth. It seems that the broader multilateral free trade deals such as the Trans Pacific Partnership will not be brought to Congress.
Early on it is possible that repudiation of as much of the Obama legacy as possible could be the GOP first order of business. As observers have noted, that may mean repealing Obamacare and reducing financial regulation such as Dodd-Frank and the Consumer Financial Protection bureau.
One thing all Republicans agree on is tax cuts—and that, in our view, could be the single most likely outcome. Both Trump’s and speaker Ryan’s plans skew cuts toward the wealthy. Trump agreed with his opponent that increased infrastructure spending is necessary, but that may prove harder to get through Congress. It is not clear if Congress will make substantive spending cuts to pay for the increased fiscal spending. This has the potential of being stimulating to the economy, but if unfunded could cause bond yields to move higher quickly.
Turning to the Fed, where is its promise to raise rates in December? Much will depend on the reaction of markets between now and the next FOMC meeting in a month. Should markets recover and treasury prices stabilize the Fed may still raise rates a quarter point in December. Should the new administration’s plans crystalize to substantial fiscal spending the FOMC may see the need to raise rates preemptively.
Janet Yellen’s term as Chair of the FOMC expires January 2018. Trump has both praised and condemned Yellen this year, but it seems likely in our view that he would prefer to install someone new as chair. In addition, there are currently two open seats on the board of governors giving the new administration a chance to move the Fed. My sense is that the rest of the GOP would prefer a more hawkish Fed and without a strong campaign promise to fulfill Trump may accede to their wishes.
Overall, I expect no large changes in unemployment or output over the next few months as a result of the election, but the increased uncertainty may lead to a challenging time for all assets until some clear signals emerge from the new administration. As always we will wait to see changes showing up in the economic numbers before adjusting client portfolios and will use our time-tested process to guide us whatever occurs.
All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.
The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product.