Investment Club United States

The US macroeconomic outlook – Lent 2017

The election of Donald Trump as President in the US has triggered a surge in positive economic sentiment based on his policy pledges. His desire to pursue a trifecta of deregulation, tax cuts and infrastructure construction while having republican control of both houses has widely been received favourably. Yet the exuberance of markets towards Trump’s policy’s have in part been backed up by hard evidence. There has been a 3.8% rise in consumer spending relative to the 3.6% rise in take-home pay. The effect on the market is obvious as shown by Nike’s better than expected estimated fourth quarter earning which caused the share price to rise by nearly 11% on the 29th of June. This spending should continue as a result of employment gains causing stronger wage growth. As a result of inflation nearing the targeted 2% interest rates should be expected to rise as immigration controls tighten, yet concerns about a flow of hot money are abated by the likelihood that most other major economies will do the same.

However the 3% growth target remains distant with the US annualised GDP growth in Q1 being only 1.4%. This has been reflected in the bond market with a consensus that the US economy faces an inauspicious future of lacklustre growth and muted inflationary pressure according to an FT report. This slow rate of growth is a result of less capital investment which is a concern to US businesses.

Mr Trump’s expansionary fiscal policy raises concerns about US national debt. It is estimated that his policies will increase it from approximately $20 trillion to $25.3 trillion. While the short-term effects of this are small in the long-term the club must continue to consider the effect on business confidence as the US government looks to decrease the budget deficit.

With the G20 conference fast approaching it is also worth considering the effect on Trump’s protectionist policies. While the G20 has a longstanding pledge to resist all forms of protectionism. A report the by the Global Trade Alert, who have monitored protectionism since the 2008 crash, say that the ‘America First’ threat appears to already be affecting international commerce. During the first 6 months of this year US national, state and local governments introduced 26% more policies that reportedly hurt other G20 countries. As a result WTO’s director-general warned that recovery in global trade remained fragile, forecasting trade growth of just 2.4%, far below the 3.5% predicted by the IMF. This could limit the growth of US multinationals.

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