Does ITR have any current published thoughts or economic trade impact scenarios you could share?
Withdrawing from the TTP process and potentially altering NAFTA has a lot of political overtones that are far more immediate than the economic implications. That is not to say that we haven’t seen an almost immediate negative impact on Mexico. We have. But the larger, systemic changes will take time to implement and will have to involve Congress. If we assume that Mr. Trump’s agenda will be fulfilled, then we agree with the bond market’s assessment of higher inflation and higher deficit spending in the years ahead; hence, the post-election jump in long-term interest rates and our expectation of even higher rates to come. Keep in mind that the bond market is a lot better than the stock market at predicting the intermediate future (18 – 24 months). We saw this scenario play out when Mr. Reagan was elected. Mr. Trump and this Congress will have to be disciplined to the extent of at least holding spending flat, or better still, reducing spending, in order for tax cuts to achieve their desired goal. Corporations will need a tax cut just to absorb the increased costs coming at them from higher material and labor costs.
Very much in question is what will happen to the tax rate for pass-through companies such as Sub-S and LLCs. These types of companies are the majority of concerns and account for more of the job growth. The labor and material cost issues will be injurious to the non-C corporations without some sort of tax break.
Higher interest rates are an issue to closely monitor. The approximately 150 basis point rise to date is not itself harmful to the economy. You add another 150 bps on top of that, and you begin to alter consumer and business behavior/decisions. Therein lies our concern for 2019 and why we have no reason to change our forecast of a minor decline in GDP and Industrial Production in 2019, probably during the first half of the year. Higher interest rates and higher costs for goods will hurt consumers as we look two to three years out. This could be offset (historically) by expansionist monetary policy. This path is highly questionable given the inflation probabilities even if we assume an inflation dove as the next Federal Reserve Chairperson.
Getting back to trade… A trade war helps no one. All sides lose in the intermediate to longer-term because history shows that the standard of living in the effected countries will slow in its ascent or even cease growing. Protectionism is a political device for garnering accolades from a vocal minority; it is not sound economic policy. Even strictly domestic companies will see higher costs as a result. Do not think this is an American-centric issue. It is part of an anti-globalization trend that has been evident in Europe and most recently before Mr. Trump in BREXIT.
The stock market reacted very favorably to Mr. Trump’s election after a raucous night. The stock market is focused on lower taxes and fewer regulations. No doubt helpful for corporate health in the short term, but that is the point. The stock market typically looks just six months into the future versus the bond market’s 18 – 24 months. Feel good and feel positive about the near-term future when the stock market is rising. We think its current rise is wholly consistent with our standing forecast of accelerating growth in the US economy in 2017, a forecast made 5 quarters ago.
Can you recommend any sources or insights that can help us better understand the potential threats or opportunities from changes in these trade policies?
I don’t know about sources to better understand the threats or opportunities regarding a change in trade. The threat stems from a reliance on outside-of-US inputs. These will either become relatively more difficult to come by or they will cost more. Companies will need a strong brand/competitive advantage position, in order to pass these costs through. Another threat is financial. US companies with overseas businesses may find themselves on the wrong side of Mr. Trump’s Beggar Thy Neighbor approach to trade. Opportunities include: cost advantages for already domestically-sourced content, helping companies find domestic alternatives to foreign-sourced goods, and helping companies become more efficient to negate some of the shift to higher costs.
This now constitutes our initial, published piece on trade and its implications. More will be coming as we see greater definition to what the Congress and the Administration create in terms of policy and not just rhetoric.