How Trump could af­fect the econ­omy

Daily Local News (West Chester, PA) - - FRONT PAGE - By Josh Boak and Bernard Con­don

Don­ald Trump won the pres­i­dency by pledg­ing to re­store a van­ished and golden eco­nomic era, when growth roared, fac­tory jobs flour­ished and Amer­ica sat un­chal­lenged atop the global econ­omy.

Yet he never of­fered much of a roadmap.

Which is why it’s far from clear how Trump will af­fect the econ­omy, even though his agenda en­joys the ad­van­tage of Repub­li­can con­trol of both the House and Se­nate. Trump has pledged to re­vi­tal­ize the mainly white work­ing class that el­e­vated him — a tough task given an ag­ing U.S. work­force, dwin­dling op­tions for peo­ple with lit­tle ed­u­ca­tion and years of stag­nant pay.

Trump has said he’d slash taxes, strong-arm U.S. trad­ing part­ners, end com­mit­ments to en­vi­ron­men­tal rules and make it eas­ier to drill for oil.

He’d lift fed­eral reg­u­la­tions, void Pres­i­dent Barack Obama’s health care law and curb im­mi­gra­tion. And, of course, build a wall on the South­ern bor­der — and force Mex­ico to pay for it.

Those steps, Trump says, would tur­bocharge the econ­omy. Yet many econ­o­mists warn that his plans could spike the na­tional debt, ig­nite trade wars and per­haps cause a re­ces­sion.

It’s im­pos­si­ble to tell how his

pres­i­dency will af­fect the econ­omy and fi­nan­cial sys­tem just be­cause so much is un­known, said Michael Arone of State Street Global Ad­vi­sors:

“What poli­cies will he pur­sue? How he moves from elec­tion to gov­ern­ing is un­know­able.”

Here’s how Trump’s pres­i­dency might af­fect sec­tors of the U.S. econ­omy and fi­nan­cial sys­tem:

Econ­omy and Fed­eral Re­serve

The pres­i­dent-elect has said he can get the econ­omy to grow nearly 4 per­cent a year; it’s now run­ning at half that pace.

He would ig­nite that growth, he’s said, by cut­ting taxes by roughly $6 tril­lion over 10 years, ex­pand­ing oil and nat­u­ral gas pro­duc­tion and slash­ing most fed­eral reg­u­la­tions.

Yet few an­a­lysts think the econ­omy can ex­pand much faster. An ag­ing pop­u­la­tion means the work­force is adding fewer peo­ple, a recipe for tepid growth. And pro­duc­tiv­ity — out­put per hour worked and vi­tal to eco­nomic health — is chron­i­cally slug­gish.

Those trends help ex­plain why the Fed­eral Re­serve says the econ­omy’s long-term an­nual growth is a slow 1.8 per­cent. That’s a ra­tio­nale for keep­ing in­ter­est rates near his­toric lows, es­pe­cially with in­fla­tion tame. Trump has called Fed Chair Janet Yellen essen­tially a pup­pet of Obama. Yellen has in­flated a stock bub­ble, Trump ar­gues, by keep­ing rates too low for too long.

Yellen’s term as chair will end in early 2018, and Trump won’t likely re-nom­i­nate her for a sec­ond term. Still, an­a­lysts don’t ex­pect Yellen to re­sign be­fore her term ends, in part be­cause of the dis­rup­tion it might cause in fi­nan­cial mar­kets.

The Fed has been con­sid­ered all but sure to raise rates at its next meet­ing in mid-De­cem­ber, re­flect­ing a strength­ened U.S. econ­omy. After Trump’s vic­tory, in­vestors still peg the like­li­hood of a De­cem­ber rate hike at 81 per­cent, ac­cord­ing to the CME Group.

In­fra­struc­ture

Trump has vowed to fix roads, bridges and air­ports — a stick­ing point in re­cent years as Congress and Obama failed to com­pro­mise on ways to pay for re­pairs to ag­ing in­fra­struc­ture.

As pres­i­dent, he said, he’d rely on tax cred­its to in­cen­tivize devel­op­ment. His ad­vis­ers have as­serted that $140 bil­lion in tax cred­its could gen­er­ate $1 tril­lion more in in­fra­struc­ture in­vest­ments over 10 years.

The ap­proach might speed con­struc­tion, though tax cred­its would likely fa­vor profit-gen­er­at­ing projects. It’s uncer­tain whether tax cred­its would lead to up­graded de­cay­ing sewer sys­tems in im­pov­er­ished cities with a shrink­ing tax base.

Over­all, the fund­ing would pro­vide what econ­o­mists see as an ur­gent pri­or­ity. Pub­lic spend­ing on trans­porta­tion and wa­ter in­fra­struc­ture has sunk be­low its 2003 levels, ac­cord­ing to the Con­gres­sional Bud­get Of­fice. Beth Ann Bovino, U.S. chief econ­o­mist at Stan­dard & Poor’s, has es­ti­mated that each dol­lar spent on in­fra­struc­ture re­turns $1.30 to the econ­omy.

Taxes

Trump’s elec­tion could mean a big tax cut for af­flu­ent Amer­i­cans, par­tic­u­larly the rich­est 1 per­cent, and a much smaller tax cut for many oth­ers.

An­a­lysts say those tax cuts would likely boost growth in the short run. But if all his changes were en­acted, they would bal­loon the bud­get deficit and po­ten­tially lift in­ter­est rates and shrink the over­all econ­omy, econ­o­mists say.

Nearly half the ben­e­fits from Trump’s pro­posed tax cuts would flow to the top 1 per­cent, ac­cord­ing to the non­par­ti­san Tax Pol­icy Cen­ter. They’d re­ceive an av­er­age tax cut of $215,000, lift­ing their after-tax in­come by 13.5 per­cent, the pol­icy cen­ter found. The top 0.1 per­cent would get a tax cut ex­ceed­ing $1 mil­lion.

Trump has pro­posed re­duc­ing the top bracket’s tax rate from 39.6 per­cent to 33 per­cent. He’d end taxes on es­tates and re­peal some taxes on in­vest­ment in­come. The cor­po­rate in­come tax rate would sink to 15 per­cent from 35 per­cent.

On av­er­age, mid­dle-in­come house­holds would re­ceive a tax cut of $1,010, lift­ing their after-tax in­come 1.8 per­cent, the Tax Pol­icy Cen­ter says. But some mid­dle- and low­er­in­come house­holds would face tax in­creases.

That’s be­cause his plan elim­i­nates the per­sonal ex­emp­tion, which lets house­holds re­duce tax­able in­come for each house­hold mem­ber. Trump would re­place that with higher stan­dard de­duc­tions. But for many sin­gle par­ents and fam­i­lies with three or more chil­dren, the stan­dard de­duc­tion wouldn’t off­set the loss of per­sonal ex­emp­tions.

Trade

Trump says the econ­omy’s slug­gish growth is due to trade deals ne­go­ti­ated by in­com­pe­tent lead­ers who be­trayed work­ers, choos­ing in­stead to fa­vor rich donors.

Mex­ico, China and Ja­pan, he ar­gues, op­er­ate by rules that have hurt the United States. He says agree­ments to open mar­kets, like the North Amer­i­can Free Trade Agree­ment, led firms to ship fac­tory jobs abroad — a trend he would stop by rene­go­ti­at­ing these deals and pe­nal­iz­ing U.S. com­pa­nies that move man­u­fac­tur­ing op­er­a­tions off­shore.

Trump says the re­sult of these trade deals is a $500 bil­lion trade gap that he’d close by rais­ing tar­iffs if nec­es­sary to re­store fac­tory jobs.

Yet for­eign gov­ern­ments could view the threat of higher tar­iffs as the start of a trade war. And even if U.S. man­u­fac­tur­ing did ex­pand, au­to­ma­tion means fac­to­ries need fewer work­ers.

Health care

Within the health care in­dus­try, Trump is viewed with trep­i­da­tion. In­sur­ers, phar­ma­ceu­ti­cal firms and hos­pi­tals would stand to lose if a re­peal of Obama’s health care law, as Trump has vowed, in­creases the num­ber of unin­sured Amer­i­cans. Even if, as crit­ics like Trump say, the Obama’s health care law is rife with com­plex­ity and com­pli­ca­tions for health care com­pa­nies, it does of­fer the long-term prospect of more pay­ing cus­tomers.

In­sur­ance and hospi­tal in­dus­try groups re­minded Trump on Wed­nes­day of his pledge to re­place Obama’s law with a sys­tem that pro­vides af­ford­able high-qual­ity cov­er­age for Amer­i­cans.

One of Trump’s main pro­pos­als — al­low­ing in­sur­ers to sell poli­cies across state lines — draws mixed re­views within the in­dus­try. Smaller in­sur­ers tend not to like it, a re­flec­tion of the fact that health in­sur­ance is still a re­gional busi­ness.

Trump is a wild card for the phar­ma­ceu­ti­cal in­dus­try. At one point, he sup­ported au­tho­riz­ing Medi­care to ne­go­ti­ate pre­scrip­tion drug prices. He also fa­vors let­ting con­sumers buy lower-cost med­i­ca­tions from over­seas.

Fi­nan­cial re­form

The fate of key piece of leg­is­la­tion passed after the fi­nan­cial cri­sis — the Dod­dFrank reg­u­la­tory re­form law — is now in ques­tion. House Repub­li­cans want to re­peal all or parts of Dod­dFrank.

The twist is that Wall Street, gen­er­ally, has lit­tle in­ter­est in re­peal­ing Dodd-Frank. Banks have spent bil­lions re­struc­tur­ing them­selves to com­ply with the re­quire­ments of Dodd-Frank and gen­er­ally be­lieve the bank­ing sys­tem is stronger with the law.

But the fate of the Con­sumer Fi­nan­cial Pro­tec­tion Bureau, which was created by Dodd-Frank, now comes into ques­tion. Congress has wanted to re­struc­ture the bureau to make it a com­mis­sion, not led by a sin­gle di­rec­tor, and to make it sub­ject to the con­gres­sional ap­pro­pri­a­tions process. That’s now like­lier.

Tech­nol­ogy

Trump’s elec­tion could have a sweep­ing ef­fect on the tech­nol­ogy in­dus­try, from for­eign-worker visas to in­ter­na­tional trade agree­ments. Mark Mo­erdler, an an­a­lyst at Bern­stein Re­search, fore­sees po­ten­tial ben­e­fits for the in­dus­try, he wrote in a re­search note:

“A pro-cor­po­rate ad­min­is­tra­tion should be pos­i­tive for the soft­ware in­dus­try: stream­lin­ing red tape, low­er­ing cor­po­rate taxes, re­turn­ing over­seas cash and fur­ther spurring star­tups.”

Still, Trump’s anti-glob­al­iza­tion stance could hurt such com­pa­nies as Mi­crosoft, Or­a­cle and VMW that do big busi­ness over­seas. And if Trump man­ages to re­strict im­mi­gra­tion and re­strict H-1B visas, it could make it harder and costlier for tech com­pa­nies to hire for­eign IT work­ers.

His vows to with­draw from trade deals in fa­vor of re­turn­ing man­u­fac­tur­ing jobs to the U.S. could raise pro­duc­tion costs for tech com­pa­nies, from gi­ants like Ap­ple to tiny tech star­tups that do man­u­fac­tur­ing in Asia.

En­ergy

The pres­i­dent-elect is sure to be friendly to the oil and coal in­dus­tries and skep­ti­cal of the re­new­ableen­ergy sec­tor. He pledged to make the U.S. a dom­i­nant player in en­ergy, in­de­pen­dent of OPEC oil.

It’s un­clear whether Trump’s poli­cies will have much ef­fect on drilling, if oil prices re­main rel­a­tively low, or on jobs in coal-pro­duc­ing states.

Trump wants to un­lock un­tapped U.S. re­serves of fos­sil fu­els. He’s sup­ported what he calls “safe” hy­draulic frac­tur­ing, which has helped U.S. oil and gas pro­duc­tion boom. And he sup­ports more leas­ing on fed­eral lands and the Key­stone XL pipe­line from Canada.

What’s more, Trump wants to re­verse Obama’s en­vi­ron­men­tal pol­icy to “can­cel all waste­ful cli­mate change spend­ing.”

Trump’s vic­tory means the end for Obama’s Clean Power Plan, which would have forced states to limit car­bon emis­sions and likely has­tened the de­cline of U.S. coal pro­duc­tion.

Auto in­dus­try

Trump’s elec­tion could shake up the auto in­dus­try, in part be­cause he’s vowed to redo trade deals and slap tar­iffs on Mex­i­can-made cars. Also uncer­tain is what will hap­pen with auto safety reg­u­la­tions and govern­ment fuel-econ­omy re­quire­ments. Trump fa­vors cut­ting reg­u­la­tions that he says sti­fle busi­nesses.

Ford was Trump’s punch­ing bag for hav­ing moved pro­duc­tion to Mex­ico. But most ma­jor au­tomak­ers and parts sup­pli­ers have built fac­to­ries there be­cause of lower la­bor costs. Trump railed about cor­po­ra­tions mov­ing jobs across the bor­der to ex­ploit what he called a lop­sided North Amer­i­can Free Trade Agree­ment. He vowed to scrap the pact, im­pose tar­iffs on Mex­i­can im­ports and pun­ish U.S. com­pa­nies in­clud­ing Ford.

Re­tail

Re­tail­ers might have to raise prices if Trump makes good on his prom­ises to re­peal trade agree­ments. He op­poses the Trans-Pa­cific Part­ner­ship, which would elim­i­nate most tar­iffs on goods from coun­tries in the al­liance. The Na­tional Re­tail Fed­er­a­tion says the TPP, which it backs, would in­crease U.S. spend­ing power by more than $1,000 per house­hold.

Trump also wants to im­pose big tar­iffs on im­ports from China and undo NAFTA.

“That will spook peo­ple be­cause so much is im­ported,” says Ken Perkins, pres­i­dent of Re­tail Met­rics LLC, a re­search firm.

Stocks

With his threats to slap tar­iffs on trad­ing part­ners, pun­ish U.S. com­pa­nies that move pro­duc­tion over­seas and re­think mil­i­tary back­ing for al­lies, Trump is widely viewed by in­vestors as an un­set­tling risk.

Still, a big stock rally Wed­nes­day in cer­tain sec­tors sug­gested that in­vestors think com­pa­nies in­volved in re­pair­ing roads and bridges or in ex­pand­ing tran­sit sys­tems could en­joy a boost un­der Trump’s plan to in­crease in­fra­struc­ture spend­ing.

Stocks of drug­mak­ers also soared on ex­pec­ta­tions that Trump’s vic­tory and Repub­li­can con­trol of Congress make a broad crack­down on drug price goug­ing less likely. Hil­lary Clin­ton had vowed to use govern­ment drug-pur­chas­ing power un­der the Medi­care pro­gram to re­strain prices.

Stocks of gun mak­ers plunged, though. Peo­ple tend to buy up guns in an­tic­i­pa­tion of rules ex­pand­ing gun checks and curb­ing cer­tain kinds of sales, but a Trump vic­tory helps ease that fear.

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