Political Woes Might Derail Trump's Economic Growth Agenda

Kristian Rouz – The ongoing slowdown in the US economy might linger for an indefinite period of time due to the anticipated protractions on economic reform in Washington, hurting the overall growth expectations for this year. While the US economy is still living in the Obama-era reality, the tax reform, a change in the country's approach to foreign trade, and the higher infrastructure spending planned by the Trump administration might take too long to come into effect, resulting in the economy losing its momentum.

The disagreements between the White House and Congressional Republicans amid the absence of any support from the Democrats might, therefore, derail President Donald Trump's economic agenda, which had promised to boost the yearly growth to above 3 percent.

The official report on US growth will be released on Friday, and the current consensus expectations put 1Q17 economic expansion at 1 percent year-on-year. Compared to the 2.1-percent growth reported in 4Q16, the current pace of expansion looks dismal, even though the first quarter of the year is a traditionally weaker period in terms of growth due to seasonal factors.

Annual GDP growth of 3 percent was last seen under the Bush, Jr. administration in 2004-2005, when tax cuts provided an impulse to business activity and hiring, while an unprecedented expansion in the financial sector and consumer credit drove massive gains in the services sector and general well-being of the nation. However, the structural weakness of the US economy was neglected in the days, which resulted in a "boom-bust" effect on the economy in the form of the Great Recession.

This time around, the White House is aiming for comprehensive structural reforms across most industries and sectors of the US economy. However, the politically-motivated disagreements in Washington might produce delays or undermine some of Trump's initiatives. The overall growth projections through year 2019 are at this point counting out the effects of the fiscal and trade reforms.

Yearly consensus estimates currently show 2.2-2.3-percent annual growth in 2017-2019. Despite the mediocre at best pace of economic expansion in the US at this point, most market participants are expecting a slight rebound in 2Q17. The pace of growth will be subdued and below the 3-4-percent year-on-year that Trump is aiming for until his administration is able to overcome the political headwinds it is facing.

"We're in more of a steady state for the economy," Scott Brown of St. Petersburg, Florida-based Raymond James Financial Inc. said. "Not much at all has happened on policy."

Since Trump was elected into office, the Federal Reserve has hiked base interest rates twice, to the current 0.75-1.00 percent, but other than that, it was only Trump's protectionist rhetoric that briefly reassured investors and manufacturers that really contributed to growth from the policy viewpoint.

Of course, Trump's fiscal stimulus and a boost in US exports would provide a more substantial foundation for US economic expansion. However, growth limitations in the form of the lack of qualified labor and weak productivity are already a reality, and while the negotiations in Washington are underway, the economy is still sluggish, as it has been over the past eight years. Nonetheless, US consumer confidence has improved somewhat in Trump's first 100 days, mainly due to the strength of the labor market, but also because of the high expectations from the new President's reformist agenda. Still, unless the "Trump effect," which is mostly psychological, is supported by solid policy measures, the economy will continue to falter. These much-needed policy measures are lagging due to the discord in Washington.

"People need to see a tangible improvement if that confidence is going to manifest itself in hard economic data," Gus Faucher of PNC Financial Services Group Inc. said.

The Federal Reserve's tightening of monetary conditions is making credit more expensive, thus hurting the purchasing power of many Americans. This means the fiscal policy must be loosened somewhat to compensate for the Fed's action. Both Trump and Congressional Republicans have an understanding of such a necessity, yet, the White House recently said its August deadline for passing the tax reform is becoming less realistic.

Therefore, US economic growth is poised to fluctuate around 2 percent annualized well into the next year until the fiscal stimulus package finally passes the Congress. Another question is if it would be quite as radical and helpful to the economy as it was outlined by Trump on his campaign trail, or if the months of political negotiations would produce a rather diluted version of fiscal reform, and hardly enough to make a difference.