Economic Growth in the President Trump Era

Regardless of which candidate you supported, it’s important to think about the political environment and its impact on economic growth in order to manage your clients’ portfolios.  Much has been made of the post-election stock market rally. The story often crafted to explain it talks about potential changes to taxes, regulation and infrastructure spending as drivers of economic growth and stock prices. Have ‘animal spirits’ been unleashed by the new regime in Washington? We wonder what John Maynard Keynes would think.

When you distill it down to its essentials, understanding economic growth is simple. The economy grows when the working population grows, and when the average worker produces more than they did last year. Let’s focus first on the productivity question. According to Federal Reserve economists, the main drivers of productivity include the accumulation of capital stock, improvements in technology, and the education and training of workers. Out of these, technology is given the most credit.[1]

Is it possible that the policy changes discussed above unleash a wave of investment in new technologies? Maybe, but domestic investment needs to be financed by domestic savings or by ‘importing’ the savings of foreigners[2]. This may be tough to do when the budget deficit is increasing, and the new President simultaneously wants to reduce the trade deficit. Perhaps the one-time repatriation of foreign profits gives investment a boost if firms resist the temptation to buy back shares. Sustainable growth in investment seems possible but within a relatively narrow range.

With regards to employment, we struggle to find a compelling argument in support of growth. The unemployment rate, displayed below, has entirely reverted back to normal (or more) since the financial crisis.


[1] What Drives Productivity Growth

[2] Hussman paper

Other measures of employment, which include part-time and discouraged workers, offers somewhat more hope but by most standards these measures are back within normal ranges. Against this backdrop are demographic changes, the retirement of the baby boomers along with historically low birth rates, that conspire against a surge in the working population.

To summarize, political forces are working to produce an environment more hospitable to economic growth than we have seen since the financial crisis. However, we believe the current optimism may be overblown. We expect growth to move towards longer term historical averages, but have yet to be convinced that a surge to four plus percent growth rates is in the cards.

Rob Cavallaro is the Chief Investment Officer of RobustWealth.  He previously was the head of proprietary trading for a large global bank.  As well, he served on the board of Archipelago.  Rob hold a Master of Business Administration from the Wharton School of the University of Pennsylvania.

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