Let’s get fiscal: Will Trump over-inflate the US economy?
Global markets were somewhat disappointed last week following Donald Trump’s first press conference since winning the US Presidential election. As we’ve come to expect, The Donald said a lot of things about a lot of issues. But one issue that failed to get a mention is the key element of his policy platform that has Wall Street so excited: fiscal stimulus.
To be specific, Trump had promised to slash the corporate rate to 15% and boost spending on infrastructure programs (in partnership with the private sector). This promise has been the main factor behind the Trump rally in recent months. Despite high equity valuations and the pressure of rising bond yields, Wall Street has pushed markets into record territory on the hope that earnings growth – which has slowed over the past year – is set to rebound in 2017.
Donald Trump. Source: AAP
Investors need not fear. Having watched his press conference in its entirety, I didn’t get the impression that Trump was backing away from this fiscal pledge. Rather, he sought to focus his prepared remarks on bread and butter issues that the “rust belt” voters who elected him really seemed to care about – tougher trade deals, better veterans’ health support, and building “that Wall” along the Mexican border. He also spent a good deal of time explaining how his children will independently run the family business while he’s President.
When it came to journalists’ questions, no-one asked about his fiscal stimulus plans, so he naturally didn’t feel a need to discuss it!
When a man has so many views on so many issues, it’s likely that not all issues may get discussed at any given time – even if that issue happens to be very important to Wall Street.
Is fiscal stimulus the last thing the economy needs?
Of greater concern is that growing fear that fiscal stimulus may be the last thing the economy actually needs. After all, although Trump likes to talk about boosting jobs, the fact is that the economy is already very close to full employment, and wages growth is on the rise.
Over at the Fed, they’re openly warning that fiscal stimulus might overheat the economy, causing interest rates and the US dollar to rise faster than would otherwise be the case. And in its latest World Economic Outlook, the International Monetary Fund (IMF) made the same warning.
Adding to the upside risks to the US economy this year is the OPEC deal to limit oil production, which has lifted world oil prices and breathed new life into the beaten down US shale oil sector. That’s behind signs of a lift in US business investment.
Will Trump over-inflate the US economy? At the end of the day, I don’t think he’d be that dumb (Trump’s talk is blunt and often clownish, but he’s not dumb!) And neither is his market savvy Treasury Secretary, former Goldman Sachs guru, Steven Mnuchin.
To the extent there is fiscal stimulus to come, it’s likely to be staggered over many years, and Mnuchin will no doubt consult with the Fed to ensure it’s comfortable with what the Administration plans.
A mixed bag
Meanwhile, at a more sector level, Trump’s barrage of comments is having mixed implications. The financial sector continues to be buoyed by higher bond yields (which make it easier for them to make money) and talk of reduced regulatory constraints. But although Trump has promised to abolish Obamacare, he’s also been critical of high drug prices faced by consumers, which has hurt sentiment toward many health care companies. And while he’s talked about boosting defence spending, he’s also been critical of cost over runs on many programs, such as for the F-35 fighter-jet – which has struck fear in the hearts of many defence contractors.
All up, Trump’s domestic policy agenda still appears constructive for the US economy and further steady gains in equity prices – notwithstanding sector specific risks in the areas such as health care and defence.
That said, the other emerging wild card is Trump’s trade and geo-political policies. Trump is a negotiator, and it could be his tough talk over Taiwan and the South China Sea are merely intended as bargaining chips to win some politically popular trade concessions out of China. Similarly, his apparent disdain for NATO could be another tactic to get Europe to stump up more (and hence the US less) for maintaining the defence pact.
But whether countries would readily make concessions in the face of such overt pressure – at the risk of a humiliating public loss of face – remains to be seen. I’m doubtful – countries are not like companies where it’s only the bottom line financial calculations that ultimately count. Countries can be stubbornly irrational.
The great fear from Trump this year is not too much or too little fiscal stimulus. To my mind, it’s an escalation of trade and military tensions with China – as being tough on the other is politically popular in both countries, it’s hard to see who will back down first before things get too far out of hand.
Published: Wednesday, January 18, 2017
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