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Friday, January 13, 2017

Question #1 for 2017: What about fiscal and regulatory policy in 2017?

by Calculated Risk on 1/13/2017 02:30:00 PM

Late last year I posted some questions for 2017: Ten Economic Questions for 2017. I'll try to add some thoughts, and maybe some predictions for each question.

1) US Policy: There is significant uncertainty as to fiscal and regulatory policy in 2017. This is probably the biggest risk for the US economy this coming year. I assume some sort of tax cuts will be passed, possibly some additional infrastructure spending, and possibly some deregulation.

These is the potential for significant policy mistakes - like defaulting on the debt (seems unlikely) - or the start of a trade war. Usually at this point in the transition process, there is a pretty clear understanding of the new administration's policy proposals, but not this time.

Goldman Sachs economists David Mericle and Ben Snider recently looked at equity prices and concluded that investors expect the following policy changes:

We draw three conclusions. First, on the spending side, the equity market appears to expect large health care cutbacks, but has moderated its initial post-election expectations for increased infrastructure spending. Second, on the tax side, the equity market seems to expect meaningful corporate tax cuts, though the evidence that the market has even partially priced a switch to destination-based taxation with border adjustment is only mixed. Third, we see little evidence that the equity market expects major financial or energy-sector deregulation that meaningfully affects profits.
Back in November I wrote: Some early Thoughts on the Impact of the Trump Economic Policies.  Here are some excerpts:
"First, in broad brushes, the Trump economic plan seems to be:
1) Renegotiate trade deals and / or impose tariffs.
2) Stricter enforcement and control on immigration, and the deportation of illegal immigrants.
3) Significant Infrastructure spending.
4) Tax cuts mostly for high income earners and corporations.
5) No changes to Social Security and Medicare.
6) Deregulation.
Most analysts think there will be fiscal stimulus in 2017 and 2018, with a combination of tax cuts and some increase in infrastructure spending.  In general, analysts believe that any changes to trade agreements will take time, and that deportations will not increase significantly.  The bottom line for analysts is that the portions of the program that will boost the economy in the short term will be enacted, and the portions that won't (trade deals, deportations) and changes to the ACA (Obamacare) will be delayed.

This is why analysts have been somewhat positive on the impact of the Trump economic proposals for 2017.  However no one knows what will actually be proposed.  What matters is the details.
Members of Mr. Trump's team have been talking about a $1 trillion infrastructure plan. However the infrastructure proposal is really a proposal for about $100+ billion in tax credits to spur private investment in infrastructure.  The $1 trillion in infrastructure investment is the projected size of the private investment, not the proposed government spending.  This proposal is actually very modest in terms of a fiscal boost.  If this is a privatization scheme, then there might be a modest short term boost, but the long term impact will be negative."
We are still waiting for the details. As far as the impact on 2017, my expectation is there will be both individual and corporate tax cuts - and some sort of infrastructure program. I expect that something will happen with the ACA (those that have insurance for 2017 will keep their insurance, but they might not have insurance in 2018 - and that impact would be in 2018). I think the negative proposals (immigration, trade) will impact the economy in 2018 or later - overall there will be a small boost to GDP in 2017.

A final comment:  The words of a President matter. Mr Trump has been impulsive, reckless and irresponsible with his comments, and that has continued since the election. One absurd comment could send the markets into a tailspin and negatively impact the economy (and that could happen at any time).

Here are the Ten Economic Questions for 2017 and a few predictions:

Question #1 for 2017: What about fiscal and regulatory policy in 2017?
Question #2 for 2017: How much will the economy grow in 2017?
Question #3 for 2017: Will job creation slow further in 2017?
Question #4 for 2017: What will the unemployment rate be in December 2017?
Question #5 for 2017: Will the core inflation rate rise in 2017? Will too much inflation be a concern in 2017?
Question #6 for 2017: Will the Fed raise rates in 2017, and if so, by how much?
Question #7 for 2017: How much will wages increase in 2017?
Question #8 for 2017: How much will Residential Investment increase?
Question #9 for 2017: What will happen with house prices in 2017?
Question #10 for 2017: Will housing inventory increase or decrease in 2017?