Where Is Economy Headed 1
Last week one of my regular readers asked when I was going to share my annual economic forecast for 2017.

I wanted to wait for the start of Trump’s presidency before I took the risk in trying to predict the economy and business climate for 2017. Specifically, would Donald Trump, the President, implement the policies that he promised? Or would he be like so many other presidents in recent years and limit their initial efforts once in office to one or two initiatives that often took years to achieve.

Based on the first weeks of his presidency, it is likely that Trump will try to implement many more of his campaign promises than what has been done by any recent US President. Despite the nuisance of his tweets and his bizarre comments at times, he has initiated many actions that potentially will have a strong impact on our country and economy.

Trump’s use of Executive Orders threatens to be more significant than any president in US history. This is despite the Republican’s constant criticism of Barack Obama’s excessive use of Executive Orders. Trump’s initial efforts suggest that he may use this tactic more often than Obama. I find this troubling.

From a long-term point of view, overuse of Executive Orders disturbs me. It indicates a potential for the Executive branch of the US Government to take authority over matters that belong to Congress or to the states. Our founding fathers were greatly concerned that the presidential office did not end up becoming more important than the legislature and the rights of the states. Most presidents in recent years have maximized the power of the presidency and Donald Trump – not surprisingly – is taking this path to a new level.

Trump’s success with either persuading companies to stay in the US or with creating a climate where they aren’t willing to risk a move overseas has been surprisingly effective. I cannot remember any time in the last fifty years where an American leader had so visibly stood up for the American worker. At a minimum, Trump has created a political environment that makes large companies think twice about abandoning manufacturing facilities in the US and moving them overseas. If the trend of more plants in the US continues, it will have a strong positive impact on US jobs and the economy.

Regarding the markets and the economy, I expect the following:

  • Economic growth in 2017 will be higher than any year since the Great Recession. Expect GDP to grow more than 3%, possibly as much as 3.5 to 3.75%. This will add jobs and tax revenues. In 2018, GDP growth of 4% or more is likely.
  • The stock market is already up about 8-10 % – depending on the index – since the election. By the end of the year, I expect the market to be higher, although we are likely to have a few corrections/dips along the way. Ending the year with the SP 500 around 2500 is a likely scenario.
  • Dips in the markets will likely be caused by political events and by interest rate hikes. The largest threat to the market is Trump’s trade policies. For example, taxes on certain imports will create issues in the world economy and likely negatively affect the economy. Protectionism is not free enterprise and history is ripe with economic downturns caused by a country imposing selfish trade policies on its trading partners.
    • The good news is that any tax on imports must be approved by Congress. I simply can’t see this happening. That is why, if such policies are proposed, the stock market will go down (a buying opportunity), and then move back up.
  • The Fed will use the positives from the economy and the increase in jobs to increase short term interest rates. Such increases are long overdue and will happen starting in March or April. These increases will keep a cap on growth. They are also why I don’t believe the rest of 2017 will feature a continuation of the stock market rally without periodic corrections.
  • As always, all bets on these forecasts are off if we have a major terrorist incident or a war. For the first time in many years, I think the threat of a nuclear incident is real. Why? Because of the progress Korea and Iran have made on developing nuclear weapons.

A forecast for 2017 would not be complete without a review of some of Trump’s proposed policy changes. Here is a quick comment on several of them and my projection of their likelihood of happening as well as their potential impact:

  • There has been talk of spending as much as one trillion dollars on infrastructure. While this sounds like a great idea, the question is how to pay for it. I think this takes a backseat to tax reform and replacement of Obamacare. Therefore, it is more of a 2018 issue, if it happens at all.
  • It would appear that a majority of people want to repeal/replace Obamacare. However, I don’t think anyone really knows how. Trump, his government team, and the Republican Congress will likely take most of 2017 trying to fix this. I have yet to hear any new proposals that don’t have serious question marks. Best guess is no legislation until Fall and I hope what is passed into law fixes the problems with the current healthcare system and is not worse than what we have.
  • We will have tax reform. This will feature lowering the corporate tax rates and potentially include some incentives to allow companies to repatriate overseas earnings with less taxes. This is positive for investments in the US.

Finally, it is appropriate to comment on Trump’s role as the leader of the free world. While his followers applaud his bully approach to the rest of the world, this may not be effective in the long run. While Obama seemed to place foreign interests ahead of the US on a frequent basis, Trump tends to do the opposite. At times, he does this to an extent that could be harmful long term. This is true both regarding the world economy and the world political stage.

My hope is that Trump will listen to his advisors and cabinet members. Overall, they seem to be a high-quality group. But recent events surrounding General Flynn’s resignation are not a good sign. Nor is the confusing dialogue about Trump and several of his cabinet member’s relationship with Putin. Repeating the words of my Moscow-born hair stylist, Putin is a gangster who wants to rule the world. Any other view of him by an American leader is a threat to the US and the free world.

Thanks for reading.
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