What will the economy look like under the first year of the Trump administration? Predictions range from the grandiose to the catastrophic, depending on the perception of what Trump will actually attempt to do when in office as compared to his campaign promises.
After an initial shock to the markets, stocks have rallied and the dollar has strengthened based mostly on the assumption that Trump will enact business-friendly policies in general — sharply cutting taxes, reducing regulations, and investing in America's infrastructure. However, his protectionist policies and inconsistent application of principles may undercut such plans. What aspects will prevail?
For a starting point, consider the average predictions from the most recent monthly Wall Street Journal (WSJ) poll of economists and the Federal Reserve's policy-setting committee.
- Gross Domestic Product (GDP) – Economists expect real GDP to continue to rise, but not to the extent Trump expects. As of December, the average WSJ prediction is 2.4% annual growth for 2017 and 2018, while the Fed sticks with a lower 2.1% for 2017 and 2.0% for 2018. The Trump/Pence campaign website states a vision of boosting growth to 3.5% on average with the potential to hit 4%.
As of October, the International Monetary Fund (IMF) projects an average 3.4% GDP growth worldwide for 2017, but that seems likely to be lowered after Trump's victory.
- Inflation – The WSJ poll predicts inflation to rise to 2.2% in 2017, a bit above the government's goal of 2%, while the Fed projects 1.9%. The Federal Reserve's rate hike plans are in line with this projection. Should Trump succeed in his growth program, inflation should rise more rapidly and force higher or more frequent interest rate increases.
- Jobs – Trump is expected to improve jobs with a two-pronged approach: adding jobs through GDP growth and retaining jobs through policies designed to keep operations in America. That may be through the carrot of improved tax/repatriation policy or the stick of punitive measures for those planning to move.
Trump's goal is to create 25 million new jobs over the next decade. WSJ economists aren't buying it in the short term, expecting an average of around 156,000 jobs created monthly and an unemployment rate of 4.6% (the current reading as of December).
- Recession Odds – Statistically speaking, Trump is likely to face a recession in his upcoming presidency. Over seven years have passed since the Great Recession, and we have been in a slow recovery phase since then. Should four more years pass without a recession, we will have witnessed the longest recession-free period in U.S. history.
However, the economist's consensus is that it is not likely to occur in 2017. Less than 17% of economists surveyed in December envision a recession within the next 12 months. Even if Trump hits the ground running (as is his style), it will take time for enabling legislation to be passed and for tax cuts and stimulus money to take effect. Those who do predict a recession are likely counting on a loose-cannon Trump sparking a trade war with words or actions (and possibly both).
- Bond Yields – Average WSJ estimates for the interest rate on the 10-year Treasury notes are 2.79%. That's great news for investors looking for higher yields, but bad news for borrowers — including the U.S. government — who will be forced to pay more in interest on their debts.
In general, economists believe that Trump's effect on the 2017 economy depends on which aspects of his contradictory policy take precedence and the amount of time it takes to implement them, as well as the ability to pass enabling legislation. Will his tax and growth policies outpace his protectionist trade and immigration approach, or will trade wars and an overly strong dollar stymie worldwide growth?
Most economists seem to be leaning toward Trump's anti-globalization tendencies carrying the day. A post-election survey from the forecasting group Oxford Economics determined that Trump's policies pose "the single largest risk to the global economy."
Even some of those who predict short-term gain for the U.S. see that growth occurring at the expense of the world economy. Business Insider gleans the following applicable summary from Jan Hatzius, Chief Economist at Goldman Sachs: "Trump may make America great again for at least a few years but the rest of the world will suffer because of it."
We tend to agree, but consider that Trump has defied the odds in many aspects. How comfortable do you feel betting against him?