How Trump Could Impact Economic Growth

Slowdowns in trade and immigration could hold back the U.S., and infrastructure spending could boost GDP, but it's too early to make any major changes to our economic forecast

Robert Johnson, CFA 14.11.2016
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Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. What impact will the Trump administration have on the U.S. economy? I'm here today with Bob Johnson, our director of economic analysis, for his first take.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, let's first take a look at the political picture a little bit about what's in the realm of possibility. What do you think are some of the areas that Trump is really going to be focused on, say in the first part of his term?

Johnson: Yeah. Well, first before we even go there, I think the one point that I would make is that, remember even when Obama first came into office and he had both houses of Congress, how hard it was to get things done. And he came in with a pretty long agenda and accomplished Obamacare and a stimulus program, and certainly the stimulus program wasn't exactly what he wanted it to be. So it's very hard, even though you have thoughts about what you want to do, but you have to run it by so many other people, so whatever he wants isn't necessarily what he gets. But there are a number of issues where he's been pretty clear that he wants something done and that could have an impact on the economy.

Glaser: So let's take a look at some of those areas. Trade is a big one, this has been a signature issue. If the U.S. does have more protectionist policies, what kind of impact could that have?

Johnson: Yeah. And I think the biggest impacts there would probably be on our trading partners, rather than us, although what will happen is we'll slow down I think the entire world economy if we do less trading; the specific advantages that you get, the specializations you get from trade are all helpful things, and now we're kind of suggesting that maybe we won't be doing that anymore and we'll have a more "buy America" type of focus. So clearly trade is going to be an issue, if he puts up trade barriers, it could make goods more expensive in the U.S. If we bring in less stuff from the rest of the world it's gonna slow their growth rates, and certainly we'll be able to sell less stuff and we may be subject to more tariffs. So clearly things to worry about there in trade, and in terms of trade it's about 12% of U.S. GDP, so it's not a small number and with very low growth rates to start with, it isn't wonderful. And we're already starting out in the hole, if you will, on trade, where there's very little growth in trade, either in imports or exports over the last year. So, clearly, some of the things he's talking about addressing have already, of their own volition really slowed up. There's like no growth in goods imports, which is just unheard of.

Glaser: Let's look at immigration, another signature issue. We've talked before about a potential of labor shortages in the U.S. If we do see a limit on illegal immigration and a crack down on undocumented immigration, would you expect some labor market problems?

Johnson: Yeah. One of the themes that we've talked about again and again, and it's maybe a little bit simplistic, but you look at a country's immigration policy: It's very closely correlated with how the company's done growth-wise. In Japan, we have no immigration, for all practical purposes, and look at what they have, a negative GDP growth and a very bad lost decade or decades. Then you've got Europe, who's got less restrictive policies than Japan, but still not the most optimal policy, and they haven't lit the world on fire with the growth rates. And the U.S. with the, believe it or not, more liberal immigration policies has done the best of those three major markets. And then you probably throw Australia and Canada in there as doing fairly well, but they're helped along by commodities too, but those countries also through the empire have been able to have a fairly high immigration rate which has helped.

Glaser: So let's look at infrastructure spending. This is something we thought now matter who was elected president could potentially be on the table. There's some bipartisan support for this. What do you expect big infrastructure spending, where would that spending be, and could it have a real impact on growth?

Johnson: The "where" will be very interesting, and exactly how it's spent. But I think everybody has decided around the world that just maybe a monetary policy and negative rates isn't gonna be enough to get things going again. How do you do that? There's many ways to do it, but certainly one of the ways is by government infrastructure building, which puts a lot of people back to work, and helps a class of people that have been having trouble finding work. So it's clearly something that could be very positive, the question is, where do we get the money to pay for that? That's been the big issue in a lot of countries. It all sounds good, "Oh yeah, let's spend more money on infrastructure," but everybody's running very tight budgets and nobody wants to pay more in taxes.

Glaser: Speaking of taxes, that's another area that Donald Trump potentially could be focused on, lowering taxes, there are other things like changing Obamacare, changing healthcare, that we don't have time to go through all of these, but when you look at the totality of what he potentially would like to accomplish or what's feasible to accomplish, does it really change your thinking on what the long-term growth rate for the U.S. is? Are you changing your forecasts at all?

Johnson: You know what? I am not changing my forecast. As you know, I've grown increasingly more cautious about the U.S. economy over the last six months as we've seen a number of key industries, like autos, like airliners, like shale, and even healthcare, are beginning to top out, and with those being key growth drivers and slowing I've been very concerned about GDP growth slowing. Now some demographic issues probably mean that's not a disaster, that we're not gonna fall to pieces or have another huge, major recession, but certainly pretty dramatic slowing in growth rates. And I think that certainly adding in some uncertainty in there--I'm not a big one that's like, "Oh uncertainty ruined these ... " anything. I think if somebody's got a great business in front of them, they're not gonna say, "Well gee, I don't know what the president's gonna do, I guess I'm not doing anything." I don't think Steve Jobs said that when he was rolling out the iPhone. So I think that's overused sometimes, but in the short run, the uncertainty created by this, until he actually gets into office and see what he wants to do first, it may just be enough to slow us up even a little bit more than I had been thinking.

Glaser: Bob, thanks for your first take, and I'm sure we'll be talking about these issues in the weeks to come.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.




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Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis with Morningstar.

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