How Will Trump’s Policies Affect Economic Momentum?

Ken Taubes is Chief Investment Officer, US.

The US may deliver growth of around 2%, as well as modestly higher inflation in 2017. Given Donald Trump’s current focus on keeping campaign promises regarding healthcare, immigration and trade, his broader pro-growth policies of tax reform and infrastructure spending may not have an impact on growth until late 2017, and in 2018.  However, the Trump administration has already begun to implement stimulus through executive orders, rolling back regulations and supporting investment.

In the meantime, we believe the US should enjoy continued solid growth, driven by strong employment and consumption. Real final sales to domestic purchasers in the fourth quarter rose at a 2.8% pace, benefiting from a solid 3.5% in consumption. Strong employment growth and multi-year highs in consumer confidence may continue to support consumption.

Strong Employment Data Should Support Growth

Source: Bloomberg. Last data point 2/28/17.

Small Business Optimism

In addition, small business, which accounts for an estimated 50% of US jobs, may bolster employment growth. Encouraged by the potential for tax and regulatory reform, small business indicated increased optimism subsequent to Trump’s election. Optimism rose to a 12-year high and hiring plans stood at 10-year highs as well.

Small Business Optimism Has Risen to 12-Year High

Source: Bloomberg. Last data point 2/28/17.

Consumption will Drive Growth

Consistent with high confidence, consumer borrowing has increased, the savings rate has declined, retail sales have risen and auto and home sales continue to be strong.

While we anticipate that consumption will continue to drive US growth, business fixed investment may again become a contributor, after detracting from growth in 2016. Solid US growth, rising energy prices and improving global GDP growth may account for increased manufacturing demand. Despite a stronger dollar, regional surveys and the Institute of Supply Management (ISM) Manufacturing Index have enjoyed solid recoveries over the past year, as the ISM Manufacturing Purchasing Managers Index recovered from a low of 48 in December, 2015 to a two-year high of 58, with both new orders and production advancing strongly.

Manufacturing Indices Still Signaling Growth

Source: Bloomberg. Last data point 2/28/17.

The capital-intensive energy sector may have a particularly strong impact on fixed investment, benefiting from Trump’s action to put the XL and Dakota pipelines back on track, as well as output agreements from producing nations remaining supportive of prices. Oil rig counts have almost doubled from their May lows of 316 to their current level of 662 (3/31/17). With energy industry advocate Scott Pruitt now heading the Environmental Protection Agency (EPA), the industry may further benefit from reduced regulation.

Improving Global Growth

Rising global Purchasing Manager Indexes (PMIs) also suggest improving global trade. Despite a modestly higher dollar, US exports have risen from their early 2016 lows. Whether exports will continue to grow depends on the path of the dollar and Trump’s trade policies.

Exports Up from Early 2016 Lows

Quarterly percent change from a year ago. Source: Bureau of Economic Analysis. Last data point 1/31/17.

Government spending may contribute at the approximate 1% level achieved in 2016. Only in 2018 should spending rise to 1.5%, benefiting from Trump’s infrastructure program, which is currently proposed at $1 trillion over 10 years.

Tax Reform will have Greatest Impact on 2018 Growth

We believe Trump’s pro-growth policies of tax reform, infrastructure spending and lower regulation will have a greater effect in 2018 than 2017. Undoubtedly, the most important policy will be corporate and individual tax reform. While the Tax Policy Center estimates a 10-year, $6.1 trillion impact from tax cuts, including $2.6 trillion from corporate and $3.5 trillion from personal tax cuts1, the House Republican Party version reflects a more modest $2 trillion impact, in recognition of concerns about the rising US deficit and US debt. For personal taxes, Trump plans to cut tax rates to 12%, 25% and 33%, limit deductions, reduce the capital gains and dividend tax rates and eliminate the estate tax and alternative minimum tax  (AMT). The corporate tax rate would be cut from 35% to 15% (the House version is at 20%), capital expenditures would be immediately deductible, and offshore cash might be repatriated at 10% and interest deductibility of debt would end. While Republicans in the House have proposed a border adjustable tax, in which imports are taxed at 25%, while exports are tax-free, the proposed policy has caused significant controversy and resistance from the US retail industry, who would be largely impacted from tax on imports.

1“Donald Trump’s Revised Tax Plan: Impact on Tax Revenue, 2016-26 by Fiscal Year and Total for FY2027-36 (Updated, November 14, 2016)

About Ken Taubes

Ken Taubes is Executive Vice President, Chief Investment Officer, U.S. of Pioneer Investments. He is Portfolio Manager of Pioneer Strategic Income Fund, Pioneer Bond Fund and Pioneer Multi-Asset Real Return Fund. Ken joined Pioneer Investments in 1998.
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