Forecaster Beware: Don’t jump the gun on Trump stimulus
Feb 1, 2017, 15:22 PM
The “Trump rally” on Wall Street is losing wind less than a week after the Dow Jones Industrial Average eclipsed a record-high 20,000 mark. Since the tumultuous overnight selloff on Election Night, stocks had been on a tear as investors bet that President Trump’s policies would spur faster economic growth. Traders haven't been the only ones feeling more optimistic though—the IMF and World Bank made significant upward revisions to U.S. GDP forecasts for 2017. In the last week, however, market enthusiasm has been tempered by below-consensus Q4 GDP and controversy around several of President Trump’s executive orders. Investors and economists may have jumped the gun on upgrading their forecasts.
These upward forecast revisions are not unfounded—Trump’s campaign touted tax cuts and infrastructure spending—but they are premature. Two weeks into the new administration and we have yet to see any proposals that would definitively increase growth in the near term. In fact, it would be very difficult for fiscal stimulus to have any impact in 2017, as many of Mr. Trump’s economic proposals will have to go through the legislative and budgeting process. Opposition from Democrats and even some Republicans on Capitol Hill will make this a laborious process, especially given the full slate of other agenda items for the President.
Even if Trump is able to enact his economic policies as planned, the stimulus will be slugging against a mature economy. Higher interest rates, the strong dollar, and a tight labor market are enough reason to believe that the natural business cycle is on the downslope. Moreover, there is plenty of evidence that fiscal policy is less effective when the economy is at full capacity, so that will work against any stimulus as well. However, if the policies are implemented in a way that enhances productivity and does not detract from private investment, we could well see an increase in GDP growth. This characterizes our upside scenario, which is less likely than the baseline, given everything that must go just right for it to play out.
CBRE EA has been steadfast in its expectation that job growth—and thus, commercial real estate demand—will gradually slow over the next few years. We expect net job gains of 1.7 million and 1.1 million this year and next, which is down from the 2.2 million jobs added in 2016. Much like the Federal Reserve, we remain in wait-and-see mode before making any drastic changes to the outlook. Having said that, we do believe it likely that the current expansion could be extended a few quarters at the expense of higher interest rates and inflation; we have penciled in a mild recession in 2019. For our detailed overview of our baseline and scenario forecasts, click here.