November 22, 2024

Every economist has attempted to predict the impact on economic growth and inflation from the long list of policies Trump is supporting.  Economic forecasting is challenging enough every  year when dealing with the usual variables — consumer spending patterns, business investment and hiring decisions, and likely changes in interest rates by the Federal Reserve.  Fancy models help economists integrate all of this information.  But even then they often get it wrong.  The reader will recall the final two quarters of 2023.   Almost every economist on the face of the planet was expecting a recession.  Instead, GDP grew by 4.4% and 3.2% in the third and fourth quarters of that year.  Economic forecasting is a humbling  business.  Now we have a new administration and things are going to change which makes economic forecasting even more difficult.  Tax cuts seem likely.  Millions of undocumented immigrants are at risk of being deported.  Tariffs of varying amounts will be imposed on goods from all countries.  Thousands of regulations will be scrapped.  But we have yet to see specific proposals about any of these things.  Nevertheless, we breathlessly analyze the dire consequences that will occur if they should be fully implemented.  But that is not going to happen.  None of these things will be fully implemented.  So let’s stop all the handwringing until we have at least some idea of what we are talking about.  Furthermore the economy is on solid footing at the moment as a number of tailwinds are going to keep it humming for the foreseeable future.

Taxes.  At the very least the 2017 tax cuts will be made permanent.  But will Trump also push for a cut in the corporate tax rate from 21% to 15%.  What about individual tax rates?  Will the cap on state and local tax deductions be allowed to expire?  How about eliminating tips income and overtime, or eliminating taxes on Social Security earnings?  With at least some emerging concern in Congress about long-term problems with the budget deficit and debt, it seems unlikely that these other widespread changes will make it through.

Tariffs.  Trump has talked about a 60% tariff on all goods coming in from China and 10% on goods from other countries.   But the  U.S. has free trade agreements with 20 countries, most notably Canada and Mexico that account for about one-third of all imports.  He will be unable to  impose tariffs on those countries.  Then, business interests are certain to lobby for exemptions from tariffs for various goods that are crucial to their production process.  In addition, other countries are sure to retaliate with tariffs of their own.  In the end, whatever is ultimately adopted seems certain to reduce growth in both exports and imports but with a relatively minor impact on  GDP.  The tariffs will also boost inflation but by a relatively minor 0.2-0.3%.

Immigration.  Trump has talked about mass deportations.  But how will he find, detain, and transport these people out of the country?  He has talked about enlisting the military in  his deportation plan.  Is that even legal?  Will he need to hire additional government employees to help?  That would be costly.  Perhaps he should limit the effort to illegals who have committed  a crime.  It will be hard to replace workers lost in the agriculture, restaurant, hotel, child care and construction industries.  Having said that, some job losses and higher prices should be expected.

Regulation.  Elon Musk is now in charge of eliminating thousands of unnecessary, confusing, and often duplicative regulations, and perhaps even closing down entire government agencies.  We wish him godspeed.  It is hard to imagine that  he could go too far.   At greatest risk are the environmental and health regulations imposed  by the Biden administration.

In our year ahead forecast we have taken a middle-of-the-road stance  on all of these issues.  We assume that the 2017 tax cuts get extended, big tariffs will be imposed on Chinese goods but a limited number of tariffs imposed elsewhere, a moderate amount of deportation focused primarily on criminals and immigrants the court system has already expelled but who refuse to leave, and a huge reduction in government regulations.

That is a lot of assumptions and we are well aware of the uncertainty that introduces into everybody’s forecasts for next year.  But until we have a batter sense of the specific proposals that Trump is going to seek and how they are going to be implemented, that is the best we can do.

In the end, we want readers to recognize is that the economy is entering the new year with a full head of steam and tailwinds at its back.  Real wages are climbing.  The Fed is in the process of gradually reducing short-term interest rates.  Technology-induced growth in productivity is not only boosting GDP but helping to keep inflation in check.  That is a dynamite combination.  If one can overlay that with lower tax rates beyond 2025 and the removal of thousands of superfluous regulations, this rosy outlook can continue for years.

Maybe it is time to be optimistic about the future instead of focusing exclusively on the ever-looming dark side.

Stephen Slifer

NumberNomics

Charleston, S.C.