The "establishment" – that bi-coastal alliance of Washington insiders, financiers, techies and media pundits – has been proven wrong. Property mogul, reality TV star and erstwhile steak salesman Donald Trump is president-elect of the United States.
The outlook for corporate America is now uncertain. In his victory speech, Trump said, "We have a great economic plan. We will double our growth and have the strongest economy anywhere in the world. At the same time, we will get along with all other nations willing to get along with us." The markets, however, are skeptical. Dow futures were down 2.65% on the news, S&P 500 futures were down by 3.10%. Gold was up 3.25%. The dollar was down, while other currencies rose.(See also, Equities Plunge, Gold Rallies as Trump Elected President.)
Some experts believe Trump will boost economic growth as well as individual earnings across all income levels. The resulting rise in consumer confidence and spending could paint a rosy picture for corporate America. Add in lower business taxes and an administration bent on deregulation, and Trump might just be the businessman that, he argues, the U.S. needs in the White House.
On the other hand, his obsession with upending decades of trade policy could spark a devastating trade war with China, which in turn could lead to a recession. Trump's lack of policy clarity and love of confrontation leave a number of other potential adverse scenarios open. To give just one example, he appeared to toy with the idea of negotiating down the national debt during his campaign, which could have a devastating affect on asset prices of all types.
The bull market is in its seventh year, and given the repeated disruptions it's experienced since August 2015, it hardly feels like a bull market anymore. There has only been one longer bull market since World War II, the 150-month monster that ended in March 2000. Similarly, the economy is overdue for a recession by historical standards. According to the National Bureau of Economic Research, the average expansionary period between 1945 and 2001 lasted 57 months. The U.S. is now in its 89th month since the end of the last recession; the previous record expansion of 120-months ended in March 2001.
Judging by these historical averages, it is reasonable to expect a downturn at some point during Trump's presidency, particularly if he wins a second term. Goldman Sachs' chief U.S. equity strategist David Costin issued a 2,100 year-end target for the S&P 500 on Wednesday (Trump will not yet have taken office at this point), compared to 2,156 at the time of writing; in other words, a decline, but no bear market.
Looking only at Trump's policy plans, independent forecasters have come to different conclusions regarding the economy's outlook. Moody's economists estimated in June that real gross domestic product (GDP) would grow by around 0.6% per year from 2016 to 2020, taking Trump's plan "at face value." That is considerably worse than the 2.3% growth they forecast under current law. Assuming Trump has to compromise some of his policies due to a hostile Congress, Moody's projects 0.4% annual growth.
The Tax Foundation is more enthusiastic about Trump's plans. The conservative think tank projected in September that his policies would increase GDP by 6.9% to 8.2% over the long term (which they do not define precisely), over and above the 19.2% the Congressional Budget Office projected for 2016-2025 in August.
Aside from his tax and trade plans, Trump has promised to grow the economy by investing in infrastructure, supporting the development of a full energy portfolio including fossil fuels, and rolling back regulations imposed by past administrations.
Jobs and Wages
The labor market has largely recovered since the financial crisis, with unemployment at 4.9%, but the participation rate, at 62.8%, has not broken out of a multi-year decline; it stood at 66.0% at the beginning of 2006. Wages have begun to tick up, but compared to rising productivity and corporate profits – and adjusted for inflation – they have remained mostly static for decades.
Moody's sees Trump's policies resulting in 3.5 million fewer jobs at the end of his first term, with unemployment rising to perhaps 7%. Trump has promised to create 25 million new jobs over the next decade, which he plans to accomplish by renegotiating NAFTA, declaring China a currency manipulator, investing in infrastructure projects and creating a "reliable, streamlined regulatory and permitting process" for the energy industry. Trump also plans to raise the federal minimum wage to $10 from its current level of $7.25.
Taxes and Deficit
Trump promises to "reduce taxes across the board." His plan collapses the current seven tax brackets into three and removes the carried interest loophole. It keeps the existing top capital gains rate. Trump plans to raise the standard deduction for joint filers from $12,600 to $30,000, introduce a number of childcare provisions and eliminate the estate tax. He would lower the top marginal corporate tax rate from 35% to 15%.
|Trump plan tax brackets|
|Joint married filers||Single filers||Income tax||Capital gains tax|
|Up to $75,000||Up to $37,500||12%||0%|
|$75,000 to $225,000||$37,500 to $112,500||25%||15%|
|Over $225,000||Over $112,500||33%||20%|
According to the Tax Foundation, Trump's plan will increase after-tax income for all income quintiles, though the effect will be significantly larger for higher earners: the bottom 20% of earners will see after-tax incomes rise by 1.2%, while the top 1% will see theirs rise by up to 16.0%. The think tank estimates the plan will decrease federal revenue by by between $4.4 trillion and $5.9 trillion over the next decade; adjusting for an expected boost to GDP growth, however, federal tax revenue will only decrease by between $2.6 trillion and $3.9 trillion.
The fiscally hawkish Committee for a Responsible Federal Budget (CRFB) estimated in September that Trump's plan will decrease revenue by $5.8 trillion over ten years, while the federal debt held by the public will rise to over 86% of GDP, from a current level of 77%. In absolute terms, that is $5.3 trillion above the level projected under current law. The public currently holds $14.3 trillion of the $19.8 trillion national debt.
Trump made trade the centerpiece of his otherwise often unfocused campaign. He hammered the compelling message that Americans are losing good jobs to foreign – specifically Mexican and Chinese – markets because the political establishment is either too "stupid" or too "corrupt" to negotiate favorable trade deals. Business elites, meanwhile, are taking advantage of government laxity to enrich themselves. Trump, as one such elite, knows exactly how to renegotiate trade deals in order to make the country great again.
Having sold this message to American voters, it is not clear exactly how he will go about rehauling American trade policy. It is unlikely that the Trans-Pacific Partnership (TPP) or Transatlantic Trade and Investment Partnership (TTIP) have any chance of becoming a reality. Trump has vowed to renegotiate NAFTA, a deal linking the U.S. to Mexico and Canada, and slap a 35% tariff on Mexican imports. He has vowed to impose tariffs of 45% on China and label the country a currency manipulator for devaluing its currency, although the rate at which the country has burned through foreign currency reserves suggests it is actively intervening to push the renminbi above market value.
The Peterson Institute for International Economics sees Trump's policies setting off "a trade war that would plunge the US economy into recession and cost more than 4 million private sector American jobs," according to an analysis published in September.