Economic Impact of Trump’s Agenda
The re-election of Donald Trump will likely have both a positive and negative impact on the economy if his proposals come to fruition. At a starting point, the Trump tax cuts that became effective during his first administration and are set to expire the end of 2025 are likely to not only be extended but include additional reductions. As of the date I am writing this newsletter, the majority party in the House of Representatives remains uncertain but is leaning toward the Republicans. With control of both houses, Trump will have a much easier path to implementing his agenda.
As most of you are aware, The Dow Jones Industrial Index rose a meteoric 1500+ points on the day after the election as Wall Street enthusiastically embraced the benefits of lower taxes and less regulation. In particular, Trump has proposed lower corporate taxes and the elimination of income taxes on Social Security, tips and overtime. While these proposals score political points, lower taxes without a commensurate decrease in spending will result in a burgeoning federal deficit. The Committee for a Responsible Federal Budget estimates that these tax cuts will add $7.75 trillion in government debt over the next decade. Lost in the euphoria over the big gain on the Dow was the sharp increase in bond yields as fixed income managers focus on the probability that long term interest rates will likely rise to appease bond holders worried about the rising deficit.
Perhaps the most important aspect of Trump’s proposed fiscal policy is the significant increase in tariffs. It is essential that we manufacture goods in the United States that are essential for our national security. However, Trump has proposed tariffs of 10-20% on all imports and up to 60% on imports from China. Since tariffs are likely to be passed on to consumers, these increases would result in higher inflation. Forecasters at Pantheon Macroeconomics project that a 10% tariff would increase inflation by about .8%. Tariffs would likely result in retaliation from U.S. trading partners launching a trade war that can have a disastrous impact on the global economy on two fronts – reduction in global trade with a slowdown in economic growth along with renewed and rising inflation. Trump has countered that tariffs will benefit the economy by adding to the government coffers and reducing the deficit as well as boosting the manufacturing sector in the United States.
There should be no disagreement in acknowledging that our immigration system is broken and requires immediate attention. However, the mass deportation of millions of undocumented immigrants could have a chilling effect on one of our most important economic issues, the housing shortage. The housing industry relies on these undocumented workers to build homes and a slowdown resulting from a reduction in workers would widen the gap between supply and demand thus continuing high home prices and stubborn inflation.
Trump has repeatedly endorsed deregulation which would increase Mergers & Acquisitions (M&A) activity. Current barriers will be removed and many proposed mergers that have been rejected, particularly in tech, are likely to move forward under the new administration. Trump’s proposal to rollback green regulations that restricts oil and gas drilling and coal mining could significantly boost shares in traditional energy sectors.
To reduce the escalating federal deficit, it should be noted that Elon Musk has offered his services and suggested he could slash $2 trillion from the budget. Most economists are highly skeptical of achieving this goal since a major portion of government expenditures are fixed such as Medicare, Medicaid and Social Security. If Musk is somehow successful in this endeavor, it would alleviate many of the problems forecasted by economists and assuage the bond market.
It is unlikely that all of these proposed changes would be enacted as there may even be pushback by Republicans. The economic landscape will certainly undergo a big change and astute observers should be actively looking for signs of both risk and opportunity.
Sincerely,
Clifford L. Caplan, CFP®, AIF®
Note: It recently came to my attention that many clients are under the impression that I am no longer taking on new clients. While I have become more selective, the practice continues to grow, thanks in part to the addition of new clients. I welcome the opportunity to work with your family and friends. Please do not hesitate to refer me to folks that can benefit from my experience and expertise.