Fiscal and Monetary Policy Options in 2020

Chief Economist Scott Brown discusses current economic conditions.

With U.S. growth anticipated to be moderate this year, little was expected in the way of fiscal policy (taxes, government spending) and monetary policy (short-term interest rates), but life comes at you fast. For the financial markets, tensions in the Middle East came and went in just a few days, but the Wuhan coronavirus has generated considerable uncertainty. The federal funds futures market now shows that a Fed rate cut is in play, while President Trump is expected to soon announce a plan to cut taxes for the middle class.

Real GDP rose at 2.1% annual rate in the advance estimate for 4Q19. As expected, consumer spending growth slowed, business fixed investment was weak, and residential fixed investment improved. Inventories slowed more than expected (partly related to the GM strike) subtracting 1.1 percentage points from headline GDP growth. However, the trade deficit narrowed more than expected, added 1.5 percentage points to growth. Imports, which have a negative sign in the GDP calculation, fell at an 8.7% annual rate in the quarter, but that likely reflects a correction from earlier stockpiling (ahead of expected tariffs). Private-Domestic Final Purchases (consumer spending, business fixed investment, and residential fixed investment), a better measure of underlying demand, rose at a 1.4% annual rate – up 2.2% year-over-year, but suggesting a slower trend. The mixed nature of growth (healthy consumer and housing sectors, weak capital spending) appears set to continue in early 2020.

Scott Brown
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The Trump tax cuts appear to have had a limited, short-term impact on growth, but will have a long-term effect on the federal budget deficit. The latest update from the nonpartisan Congressional Budget Office projects trillion-dollar deficits as far as the eye can see. The government isn’t experiencing any difficulty in borrowing currently, but a much bigger problem lies further out. Beyond the 10-year horizon, entitlement spending is set to surge, lifting the federal debt sharply higher as a percentage of GDP.

Meanwhile, President Trump is expected to propose middle-class tax cuts in his State of the Union speech (February 4). An election year ploy, to be sure, but likely to provide more bang for the buck (although also adding to the federal budget deficit).