The biggest economic story of 2016 could have no other answer: Donald Trump’s presidential win and the advent of Trumponomics.
In the weeks since Trump’s election victory in the early hours of November 9, Trumponomics has come to stand for a number of particulars but in short represents the potential, or promise, or pitfalls of the economic plan markets expect him to pursue as president.
Under President Trump, markets expect lower taxes, more infrastructure spending, possible trade restrictions, and higher GDP growth.
But in short, Trumponomics has come to redefine what many thought possible or likely in the world of global and US economics as we head into next year. And during a year when US bond yields hit a record low and optimism about global economic growth hit its nadir, Trumponomics redefined the economic conversation.
Where we stand
At the end of 2016, the US economy stands about where many thought it would at the beginning of the year.
There is no recession looming. The unemployment rate is at a post-crisis low. Overall GDP growth is around 2%, not good but not awful. Consumer spending is solid. The US housing market is recovering but supply is constrained. Looser fiscal and tighter monetary policy seems likely next year.
Most observers at the beginning of the year, however, would’ve expected either Hillary Clinton or a non-Trump Republican to be sitting in the White House. Congress seemed likely to be divided. A disappointing mix of compromise and inaction from Washington on the election’s promises seemed likely.
And then Trump won. Republicans took both houses. And the economic story of the year became not what had happened, but what would happen next.
So far, everything is looking up
In the weeks that followed the presidential election, the most closely-watched economic data have been consumer and business surveys. And they are all trending up.
Readings like the University of Michigan’s consumer sentiment survey and the NFIB’s Small Business Optimism index have had sharp rises since the election. And these measures most succinctly reflect what Trumponomics has really been all about so far: hope.
“Consumer confidence surged in early December to just one-tenth of an Index point below the 2015 peak—which was the highest level since the start of 2004,” said Richard Curtin, chief economist for the University of Michigan survey, earlier this month. “The surge was largely due to consumers’ initial reactions to Trump’s surprise victory.”
“Putting the pieces of the puzzle together, we find a general improvement in consumer and business sentiment following the election,” economists at Bank of America Merrill Lynch wrote in a note to clients earlier this month.
“This reflects clarity on leadership following the contentious election as well as the emphasis on tax reform and expectations of a more pro-business regulatory environment. That said, companies generally expressed a desire to ‘wait and see’ which policies are passed before changing investment plans.
“There were also some concerns about changes to trade policies and a further strengthening in the dollar. Overall, we think a continued turn higher in animal spirits presents upside risk to our forecast for growth in the next two years, particularly in the back half of 2017.”
The Trumponomics outline
Any discussion of Trump’s economic plans must begin with taxes.
Like recent generations of Republicans to come before him, Trump has pledged to cut taxes both for corporations and households. And what has markets most excited as we head into 2016 is the potential for Trump to take the corporate tax rate down to 15%.
Currently, the US corporate tax rate stands at 35% (39% if you account for the average 4% state and local tax), one of the highest rates in the world and the highest among major developed economies.
An analysis from Goldman Sachs after the election argued that every 1% reduction in the corporate tax rate would add $1.50 of earnings to the S&P 500 next year. A reduction in the corporate tax rate to 15%, then, would send the S&P 500 to 2,400 assuming the same earnings multiple for the index.
The financial market reaction to Trumponomics has been to take tax policies as an uninhibited good. Companies that do little or no business overseas — and therefore pay very close to the statutory 35% tax rate — have seen their stock prices run higher since the election. The Russell 2000, an index of smaller companies with a tighter US focus than the S&P 500, has outperformed since the election.
The other two pillars of Trumponomics — infrastructure spending and trade restrictions — are less straightforward.
Markets have to this point seemed largely unbothered by the risk of Trump starting a trade war. Also of note: Trump nominee for Commerce Secretary, Wilbur Ross, told Yahoo Finance back in the fall that there “aren’t going to be trade wars.”
But Trump’s exact intentions on trade still aren’t entirely clear. His post-election interactions with Ford and Carrier, among other companies, indicate that he plans on pressuring companies to bring or keep jobs and production in the US. Trump has, however, threatened tariffs on imports made by companies once located inside the US that moved overseas and tried to sell products back to the US.
On infrastructure, more government spending has been anathema to Republicans over the last eight years. With control of the White House and both houses of Congress, however, fiscally conservative Republicans could be swayed to endorse larger government outlays. Additionally, Trump’s infrastructure plans seem likely to seek at least some private funding of infrastructure projects, potentially as part of cash repatriation tax holiday.
Concerns have already begun creeping up around Washington, D.C., however, that Trump’s campaign promises on infrastructure could disappoint.
Markets, particularly the fixed income markets, have been pricing in the likelihood of higher interest rates next year and in the years to come. Part of this is motivated by a firming labor market and a potentially more aggressive Federal Reserve. But the conditions for more inflation and higher rates were in place before the election and still hold.
A big infrastructure package, and a more stimulative fiscal stance from a Trump administration, could also move the rates and sow the seeds of overall higher economic growth. Faster growth, in turn, would underpin higher interest rates. And it is this confluence of factors that has led for some to call for the end of the 40-year bond bull market.
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Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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