With Donald Trump surprising many in his astonishing rise to the American presidency, now seems like a good time to review how the economy might perform in the coming first year of his presidency. In what follows are three topics on the 2017 horizon, including the American consumer, business investment, and Federal Reserve interest rate policy.
The American Consumer
First up, the American consumer. During the outgoing administration, the American consumer, as measured by Retail Sales, was fairly subdued. Nothing grand, but nothing havoc-wreaking either.
Currently, Retail Sales are barely growing above the 2% clip, an anemic rate when considering that around 70 percent of “official” U.S. GDP stems from retail spending.
Question – with the retail sales in weak territory, a place they’ve been for the past couple of years, can the incoming president do any better?
Well, the answer depends upon at least three things. First, will the confidence of American consumers keep thriving? If Donald Trump finds a way to inspire more confidence in the American economic picture, it will certainly show up in their spending habits. Second, how will Americans respond to the proposed tax cuts? If tax cuts induce spending, Retail Sales will surely rise. Third, can Trump get something out the Millennial generation? The Millennial generation showed little love to the Obama Administration, and if Trump is going to see anything close to 5 percent Retail Sales growth, he’s going to need the younger generation feeling more confident in their economic future.
Business Investment
The consumer outlook is critical to a successful Trump presidency. Perhaps even more influential is the business community’s outlook, as measured by business investment. One commonly used gauge for the state of business investment is Durable Orders. There’s lots of room for improvement here. Over the past couple of years, Durable Orders have continuously decelerated after peaking in July/September 2014. If Trump is going to have any success with his economic legacy, he’s going to need this trend to reverse. Perhaps the proposed tax cuts and other policy choices will flip this, and if so, the incoming Trump Administration could see some of the strongest business investment years presidents have ever seen. That’s a big if.
Federal Reserve Interest Rate Policy
The outgoing Obama Administration saw just one rate hike over its 8 years in office. Incredible if you think about it. No other president that served a full 8 years received such charity. The question here is whether the Fed will be so accommodating for President Trump. If one looks at the general political bias of the Fed, the answer is probably no. Of the past 78 rate hikes, about 75 percent have occurred during Republican administrations. Perhaps Republican administrations didn’t need the help, but then again, perhaps there’s something more to the Fed’s political views. Trump might need the help of the Fed the way the Obama Administration got it – we’ll see if he gets it.
Conclusion
Overall, among the many variables that will make or break the incoming Trump presidency, three are critical: the response of the American consumer, as measured by Retail Sales; the response of businesses, as measured by Business Investment; and the response of the Federal Reserve, as measured by their interest rate policy. Derailments or acceleration in any one of these indicators could cause large-scale impacts on Trump’s economic legacy.
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