Want Growth?
News from the incoming Trump administration last week, particularly the proposed appointments of Wilbur Ross as commerce secretary and Steven Mnuchin for treasury, augment our expectations of a more business-friendly environment. A lower corporate income tax rate, a tax holiday on repatriation of profits held abroad, fewer regulations, and a boost in infrastructure spending would all help accelerate economic growth, as we have discussed over the past few weeks. These policies to increase growth face two potential headwinds from a Trump administration, however: labor shortages and higher trade barriers. With the solid jobs report on Friday, an unfriendly immigration policy would exacerbate the growing scarcity of labor. The policies to increase growth, without an accompanying increase in the labor force through greater labor participation (naturally limited by demographics) or immigration will only add to upward pressure on wages, inflation, and interest rates.
Trump’s previously announced intention to reduce illegal immigration has been scaled back tremendously and he now suggests that he is likely to deport only the 2-3 million illegal immigrants who have broken the law, rather than all illegal immigrants. This is actually in line with the roughly 2.5 million illegal immigrants that Obama deported. This suggests that his immigration policies are less likely to be a headwind for the economy, but neither are they likely to help growth very much.
While we have been concerned about the future path of trade policy under Trump, Wilbur Ross’s appointment in commerce could keep any disruptions to a minimum. His business experience and his recent public statements (“there aren’t going to be trade wars”) provide important reassurance that the US will not suddenly turn away from globalization. He seems intent on improving access to foreign markets for US firms, particularly in those countries currently running large trade deficits with the US, such as China and Mexico, which stand to lose the most from reduced access to the US market. While this will undoubtedly spawn some contentious discussions, Ross seems unlikely to allow the US to shoot itself in the foot in its efforts to improve regional or bilateral agreements.
We see the deal to keep several hundred Carrier jobs in the US as more of a PR stunt than as an example of the policies to come. First, the republican congress has long been averse to the government trying to pick and then subsidize winners, and second, it creates a terrible incentive for other firms to feign a move to outsource production simply to extract a similar subsidy to stay. We expect Wilbur Ross to recognize the danger of this approach and to stick to efforts to improve international market access more broadly through improvements in regional trade agreements.
We remain positioned to take advantage of the coming moves towards faster growth in an environment of rising interest rates. While we do not expect this growth to materialize quickly, firms tend to make investments well in advance, as probabilities of policy improvements rise. Stock prices have already begun to react, but here, too, we should expect that the move thus far has allowed for only a fraction of the potential policy improvements, since investors know well how difficult policy implementation will be and will wait for greater clarity before making full bets. This points to room for further increases in valuations.
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