Donald Trump inherits a far healthier economy than the one his predecessor faced eight years ago. It’s hard to guess what will greet his successor.
If he convinces Congress to adopt his pro-growth ideas and abandons the worst of his trade and immigration proposals, the next four or eight years might merit Trump-like adjectives: amazing, fantastic, even huge.
In that benign scenario, growth could pick up as soon as next year. Workers’ paychecks may get fatter, but inflation will nibble away a little more of their value. Interest rates also are likely to move higher.
Much of the boost would come from old-fashioned fiscal stimulus. That may not sound like a Republican policy, but Ronald Reagan pushed through big tax cuts and spending increases during his first term. Trump aims to do the same.
“Fiscal policy has been absent throughout the recovery period,” says Kurt Rankin, regional economist at PNC Financial Services. “There’s support for infrastructure spending on both sides of the aisle, so common ground shouldn’t be hard to find.”
Gregory Daco, head of U.S. macroeconomics at Oxford Economics, is penciling in a “moderately expansionary” package of $500 billion in tax cuts and $125 billion of infrastructure investment over the next decade. Both sums are much less than Trump called for during the campaign, but probably more than a Democratic president would have gotten through a Republican Congress.
James Bullard, president of the St. Louis Federal Reserve Bank, hopes Trump’s policies will boost the economy. “A targeted (infrastructure) program that would improve productivity could be helpful,” he said Thursday.
Reduced environmental, financial and other regulations might also help, Bullard added: “The regulatory pendulum swung a long way after the (financial) crisis, and it would be a good thing for the pendulum to swing back to a more normal level now.”
These policies, it should be noted, all involve trade-offs. Fiscal stimulus now probably means higher interest rates and less investment a few years from now. Relaxing regulations may increase the eventual cost of climate change and make financial crises more likely.
“We’re likely to have faster growth, higher rates and somewhat higher inflation than would have occurred under (Hillary) Clinton,” says Chris Varvares, senior managing director of Macroeconomic Advisers in Clayton. “But it’s because there are some things that may not have good long-term consequences for the economy.”
Trump’s trade and immigration policies are among the more potentially damaging items on his agenda.
Economists who are optimistic about the next four years hope he will find a way to tighten border enforcement without deporting millions of people, talk tough toward China without igniting a tariff war, and renegotiate the Trans-Pacific Partnership rather than scrapping it.
Not everyone is an optimist, though. “Our view is that the negatives will be present and will reduce growth, especially over a longer period of time,” Daco says.
He has marked down his forecast slightly for 2018, but admits he’s really not sure how the economy will look in four years. We could have a booming construction sector and rising incomes because of a super-effective Trump stimulus plan, or we could have our technology, auto and agriculture sectors reeling from trade policies that make them less competitive.
Daco says Trump opens up “a wider spectrum of possibilities,” which is the very definition of uncertainty. Because confidence drives consumer spending and business investment, that uncertainty itself could be huge for the next few weeks.