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The American economy under a President Trump: a primer

patterns of thought

Donald Trump has a plan that’s not aligned with those of his party and no history of government service to reference, so the future economic picture of his presidency is a cloudy one. But there are some clues.

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    Donald Trump turns to face the US flag at a campaign rally in Sterling Heights, Mich.
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Americans sent a clear message during Tuesday’s presidential election: They want radical change. They soon will get their wish. Though what that change will bring for the wellbeing of Americans and the economy, no one can predict, given that Mr. Trump has an economic plan that’s not aligned with the plans of his party, and no history of government service to reference.

Wall Street is not panicking so far. Global investors were caught off-guard by Trump’s victory – the polls had predicted a different outcome – and stock futures plunged on Tuesday night. But the market had rebounded by the start of the business day on Wednesday. The Dow Jones Industrial Average closed up 218 points on Thursday, hitting a new high.

“Markets have taken the results in stride,” Michelle Meyer, head of US Economics at Bank of America Merrill Lynch Global Research said on a call with reporters Wednesday. “If that proves to be fleeting and we see more volatility, that would be somewhat damaging for the economy.”

A couple of factors may have assuaged investor’s initial fears. First, Trump’s incendiary rhetoric was toned down in his early Wednesday morning acceptance speech, in which he called for unity among the parties and the American people.

Additionally, a Trump presidency likely means less regulation of some industries, such as finance and pharmaceuticals, plus corporate and individual income tax cuts. In the short term, these cuts could support economic growth, says Ms. Meyer and other economists.

On Wednesday, Meyer projected that during 2017, the the country will see a 1.8 percent growth in GDP, a metric used by the government to measure national economic health. That's slower than recent economic growth; GDP expanded at a rate of 2.9 in the third quarter of this year, though that bump was unusual and likely short-lived, said some economists. Plus, consumer spending, which accounts for about 70 percent of the economy, slowed in the last quarter.

Meyer and other analysts predict that the uncertainty shrouding the new president will prevent a previously-anticipated rate hike by the Federal Reserve in December, and could dampen business spending in the first half of next year.

But beyond the immediate future, the longer-term effects of a President Trump on the economy is difficult to envision without many clues yet to the policies he will try to push through when he assumes office in January and the advisors and cabinet Trump will surround himself with.

“We don’t know the answers to any of those questions right now,” says Greg McBride, chief financial analyst at Bankrate.com, a financial information website. “Uncertainty could dampen both consumer and business spending.”

One thing the president-elect has made clear is an aim to bring back blue collar jobs by renegotiating trade deals with countries like Mexico, Canada, and China that would make it more expensive for American companies to manufacture their products overseas. Trump also has said he wants to spur economic growth by cutting taxes across the board, curbing immigration to free up jobs for Americans, and repealing the Affordable Care Act in favor of tax-free Health Savings Accounts, tax-deductible insurance premiums, and the sale of health insurance across state lines.

A more isolationist direction for the country could affect global relations, some worry. A decline in trade also could dampen economic growth by raising the prices of imports and reducing the amount of goods and services available in the country.

“We’re just going have to sit tight for now and see what he ends up attempting to push through in beginning of his term,” says Meyer.

Companies in Silicon Valley are anxious that a curb on trade and immigration could make it harder for them to do business overseas and to hire foreign engineers. And some economists predict that Trump’s tax cuts will only help the wealthy.

“Historically Republicans get elected promising tax cuts and they deliver,” says Aaron Klein, an economist at the Brookings Institution, a public policy think tank. But, adds Mr. Klein, “those tax cuts have traditionally benefited the holders of capital which exacerbates income inequality.”

Analyses from the nonpartisan Tax Policy Center have backed up this concern. The think tank has estimated that Trump’s tax cuts could add trillions to the national debt, and that nearly half of the cuts would go to the highest-income one percent of households.

A 2013 analysis by The Washington Post found similar results. It projected that George W. Bush’s tax cuts of 2001 would likely continue to drive federal budget deficits 20 years after they were enacted. The Post also estimated that the cuts widened income inequality in the 2000s by benefitting the wealthy more than the middle class (though many middle-class workers did get to take home more pay as a result).

Tax cuts are tried and true Republican territory, but Trump has also put forward one proposal that is more commonly spotted across the aisle: a massive investment in America’s infrastructure. The president-elect has vowed to spend $1 trillion to rehab America’s roads, tunnels, ports, and bridges in a national project that he says could create millions of jobs.

There is no plan yet for how the government would afford such an investment. But as Merrill Lynch economists point out, if Trump’s administration can get American companies to bring back the $2.5 trillion in profits they have stashed overseas, as he has proposed to do by lowering their tax bill, this could help pay for an infrastructure investment and to offset lower taxes.

President Obama also sought to introduce an infrastructure spending program to boost the economy, but was blocked by a Republican Congress. Trump, who will inherit another Republican Congress, may have a better shot now that Congressional gridlock has been cleared by a full Republican sweep of government.

That would be the best case scenario, says Klein. “Because Trump is not inherently tied to either party machine, he could use that freedom, flexibility and bully pulpit to break the logjam over simple, commonsense solutions such as investing in infrastructure,” Klein says.

 
 
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