The U.S. Economy In 2017: What Can Trump Achieve?

by: John M. Mason

Summary

Markets seem to be expressing high levels of optimism for the new Trump administration and its promises for economic revival.

Given this, it is still important to remember that the current economic recovery is seven and one-half years old and has been very modest in terms of its accomplishments.

Furthermore, the problems in the economy seem to be on the supply side and supply-side remedies tend to take longer to spur on the economy than do short-run demand side policies.

President-elect Trump is raising a lot of hopes about future economic growth. Tax cuts, regulatory changes, and infrastructure spending seem to be behind the optimism.

Questions remain... What will he actually propose? When will it be put into action? And, when will the economy feel the effects of the program?

High hopes have been created and there is talk that animal spirits are picking up.

The rise in the stock market has been one place where the optimism has been exhibited.

There is rising consumer confidence.

"A measure of consumer confidence shot to its highest level in more than 15 years in December as Americans saw more strength ahead...following the election of Donald J. Trump as president."

Inflationary expectations, as measured in the bond market, have rebounded and, at the close of the market yesterday, were slightly above 2 percent. The inflation objective of the Federal Reserve System is to get inflation back up to a 2 percent level.

And, the value of the US dollar in foreign exchange markets continues to strengthen. On Wednesday morning, it took less than $1.04 to purchase one Euro.

All these are signs that consumers and markets are looking positively toward what Mr. Trump and his administration can do for the economy.

There still is a question of just how much the Trump administration can deliver. For one, a lot of people are thinking about what President Ronald Reagan was able to do just after he became the president in 1981. The economy took off. However, the economy was not doing so good before Mr. Reagan was elected and the state of the economy was an important part of why Mr. Reagan was elected.

Mr. Trump faces the situation that the US economy has now achieved seven and one-half years of growth since the Great Recession. This is the third longest economic recovery since the end of World War II. The unanswered question here is just how much longer can this period of economic expansion continue?

Of course, the economy has not really grown that rapidly during this recovery period and has not built in a lot of excesses. Overall growth has been at a 2.1 percent compound rate per year for the whole period...very modest by historical standards.

Going into 2017, the US economy is coming off a very weak year in terms of economic growth. Year over year, in the third quarter, the real growth rate of the economy is only 1.7 percent, up from 1.3 percent in the second quarter.

Even with a good fourth quarter it is hard to see economic growth reaching 2.0 percent for the year, which would put the growth rate right around the year-over-year rate of growth for 2015 that came in at 1.9 percent.

Not helping this picture at all is the fact that through November, the growth rate of industrial production is still in negative territory, year over year, and the capacity utilization experienced in the manufacturing sector is lower in the fourth quarter of 2016 than it was all year.

Furthermore, short-run demand side policies do not seem to be as effective these days as they have been in the past. The problem of the US economy seems to be on the supply side, especially in terms of the growth in labor productivity and productive business capital investment.

Even the Federal Reserve does not seem to be too optimistic about future economic growth, forecasting that the economy will only grow around 2.0 percent per year for the next several years. And, if the value of the dollar continues to rise against other currencies, this could have significant negative effects on future economic growth.

There has been talk within the circle of Trump economic nominees that they can get economic growth up into the 3 percent to 4 percent range. Call me overly cautious, but I believe that this is way beyond the range of possibilities over the next four years. I just don't think that the economic situation of the US can be turned around that fast, especially after the events of the past eight years. Given this call for caution, I really believe that the US economy cannot grow faster than a 2.0 percent to 2.5 percent range for 2017. And, I am cautious about going above 2.5 percent for the year or two after that.

We are facing supply-side issues of restructuring the economy. These issues take time to resolve and, for me, a movement toward this restructuring would be most encouraging and create a feeling of greater hope for the future of the economy. Let's hope that the restructuring gets underway and that I am on the low side of what is actually achieved.

But, this scenario is presented not taking into account other issues in the world situation that could cause disruptions to the overall health of the situation. I will stick by my forecast, but I think it will be important for us to watch closely other events in the world to be prepared for some "shocks" that could result in far worse outcomes. For example, there is the Middle East and what might happen there. This whole area could "blow up" and create a major problem for continued economic growth.

Furthermore, there is the situation concerning the leaving of Great Britain from the European Union. But, this does not include the problems in Italy and Greece and elsewhere in terms of keeping the EU together as it now is.

And, there are other problems that could blow up.

Bottom line - don't expect economic growth in the US that is too vibrant, and be prepared for possible unpleasant events within the world that could result in major disruptions to business as we know it.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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