Trump has played two major cards in 2017, which should dramatically affect the US economy - Deregulation and Corporate Tax Cuts.
In a previous blog of mine, I laid out the conditions that the QE3 (quantitative easing to stimulate the economy by going into debt) had on the economy during the Obama Administration - See the link on Note 1 below.
I predicted correctly that further stimulus would not be necessary, because employment was up, the stock market would remain stable, and that inflation would be kept in check by the Federal Reserve's low interest rates. However, with that said, eventually the infusion of cash from previous stimulus (QE1, QE2, and QE3) will come home to roost. In other words, we have to pay off the debt...that is if we don't want to be cruel to our descendants.
Trump's Deregulation
With the implementation of deregulations on businesses, and in many cases a reversal of Obama's executive orders, corporations have felt confident enough to invest and produce products and services in hopes of the future. As a result, the US has seen about a 3% GDP through most of 2017. That is a full percentage better than the last eight years.When the economy expands so well, it follows that interest rates would climb. The Federal Reserve has decided to raise interest rates slowly, so as not to upset the markets, thus keeping inflation low and still allowing Wall Street to wean itself from the easy money allocated through quantitative easing. However, if interest rates rise too fast in 2018, Wall Street will have a fit, which would put the breaks on the current fast-paced economy.
Trump's Tax Cuts
The 2017 US Tax bill (Tax Cuts and Jobs Act of 2017) slashes corporate tax rates and to a lesser degree lowers personal tax rates. I agree with Steven Mnuchin (US Treasury Secretary) that this will bring off-shore dollars back into the US and stimulate the economy to over 4%.Two events will most likely occur.... The economy will heat up so fast that the country may actually cut into the debt and deficit, and the Federal Reserve will increase the interest rates at a greater rate than in the recent past. The more the economy grows, the quicker the debt is erased...but if interest are too high, a lagging market will be a drag on growth.
Some believe unemployment is as low as it can go and therefore companies cannot hire any more US citizens. This is a misunderstood concept. The current unemployment calculations use the U3 measure; meaning only those few millions on food stamps are available to work. Unfortunately, the U3 doesn't consider the millions more out-of-work people who are willing and able to take a job but don't fit the narrow BLS definition of "unemployed." The U6 is a more accurate measure and is currently around 8%. Therefore, millions of workers ARE available and will be able to comfortably fill company demand for at least the next year.
Consumer confidence
By October of 2017, consumer confidence had risen to the highest it's been in 17 years (see note 2).Consumer confidence is another factor to economic growth and a byproduct of deregulation and tax relief. As I mentioned in a previous blog (see note 3) I stated that both consumer confidence and jobs were key in getting the economy soaring again. In the last administration, confidence and jobs suffered from numerous regulations and higher taxation.
When consumers feel the economy is doing well, they spend money. However, it isn't just consumers, it's the business sector as well.
When taxes are reduced and there are less regulations, businesses are freed up and confident enough to hire...thus, jobs are created. Businesses with less regulations want to produce and buyers want to buy...which in turn stimulates the economy.
I've said before that the real proof if the QE3 has worked was - if it created jobs (which I believe is the true sign of a recovery). A functioning economy is akin to fixing a leaking boat so it can float, but a healthy economy is like a boat that can soar through the economic waves of business. In some ways, the QE1, QE2, and QE3, did keep the markets afloat; unfortunately, the millions out of the workforce and on food stamps proved it was probably not worth going into trillions of debt for. Therefore, Trump's stimulative effect should not only get people working, but also give the added effect of decreasing the debt and deficit.
The Future of the US Economy
I predict that the result of Trump's initiatives will be a huge 2018 economic surge. A 4% GDP is likely and 5% GDP may be possible. As the economy heats up, physics says there is a point of equilibrium where the US economic light can only burn so bright.
By 2019 a plateau may occur, and if Trump continues his strict immigration policy the US will either have to raise wages or hire workers from outside the country (or both) to continue further growth.
A strong economy not only means putting more money into the economy, but paying off debt. And with trillions coming back into the US, it's a perfect time to pay off foreign nations' loans. This would not only be fiscally prudent, but also prudent by allowing the US to be politically healthy and independent.
Note 1 http://www.garyriedl.com/search?q=qe
Note 2: https://www.bloomberg.com/news/articles/2017-10-31/u-s-consumer-confidence-index-rises-to-highest-level-since-2000
Note 3: http://www.garyriedl.com/search?q=qe3
