Donald Trump has been elected the 45th president of the United States, and both houses of Congress are now in Republican hands. Just as with Brexit, markets underestimated the strength of the populist movement. Trump struck a deep chord among lower and middle-class Americans reeling from manufacturing job losses over the past few decades, the slow economic recovery since the 2008 financial crisis and Washington’s lack of response in addressing these problems.
We believe that in the medium and longer term, the impact of Trump’s victory, although uncertain, may be positive for the US economy. Trump’s policies of lower regulation and lower taxes could be highly stimulative for US GDP growth. The wild card that could partly offset these pro-growth policies is his threat to be “tough-ontrade.” However, many in the all-Republican congress are generally supportive of free trade, so the political process may lead Trump to compromise, mitigating the more negative aspects of his trade platform.
Economy: Potential for Higher Economic Growth and a Wider Deficit
With a Republican House and Senate, Trump does not face Obama’s gridlock challenge. Many of his policies could be at least partially adopted. Areas in which Trump’s goals are consonant with those of the Republican party lower regulation, corporate tax reform and income tax cuts, as well as higher infrastructure and defense spending-could significantly boost economic growth. Corporate tax cuts could incentivize corporations to bring jobs back to the US and encourage increased business investment. In addition, Trump’s focus on reducing restrictions in the oil and gas sector, and reforming Obamacare, may be positive for the economy. Rising premiums for unsubsidized participants and penalties for non-participation related to Obamacare are creating headwinds for lower middle-income consumers. Addressing rising health care costs is essential to continued strong consumption, a major driver of US GDP growth.
The biggest uncertainty for future economic growth relates to trade policy. Trump has proposed imposing tariffs and rejecting trade agreements. He carried the election in part based on his promise to protect US jobs. We believe the Republican Congress could mitigate the more extreme aspects of his trade policies. It is important to note that Trump’s proposals to increase tariffs would involve a year-long administrative process, and any proposed repeal or revision of the North American Free Trade Agreement (NAFTA) would require Congressional approval.
The following table summarizes key policies and programs proposed by Trump. If all his policies were fully adopted, the Committee for a Responsible Federal Budget estimates a $5.3 trillion increase in the federal debt over 10 years.
Market Impact: Potentially Positive in the Intermediate and Longer Term, with Rising Inflation
US and European markets have already recovered today from the sell-off following Trump’s victory. While the longer-term market impact of Trump’s victory is uncertain, corporate earnings may benefit from lower taxes, less regulation, and faster growth, helping boost both the US credit and equity markets. On the other hand, higher real yields caused by increased GDP growth, and rising inflation would be negative for the US Treasury markets.
Trump’s impact on the Federal Reserve will not be immediate. While Trump has been critical of Yellen, he cannot remove her as Chairman of the Federal Reserve until the end of her term in February 2018. However, he can appoint governors to fill the three vacancies coming up in 2017.