- The start of President Trump’s term has been unpredictable
- His first 100 days in office have revealed that: i) he is sticking to many of his promises, even though they are controversial, ii) still, he has been forced to pull back several measures, iii) he does not necessarily count on Republican support in Congress and iv) he has gotten off to a slow start with key government nominations, which partly explains the delay in some policies
- President Trump: i) continues to have strong approval ratings among Republicans, while ii) his announcements have contributed to giving financial markets a boost
- On balance, we continue to think the positive momentum of the US economy will receive an impulse from President Trump’s economic agenda, but the magnitude of the stimulus has been watered down due to the weaker-than-expected government coalition
During the long campaign and his initial period in office, President Trump made a number of promises. He has been quite active during his first 100 days, but he has faced many challenges in fulfilling his plans. Although he has signed 30 executive orders, more than any other president, not all have been successful. The country’s checks and balances system seems to be working, as several of the President’s controversial decisions have actually been blocked. Meanwhile, Republican support remains far from unconditional. Although the first 100 days is rather short to be conclusive, in this note we assess the major challenges President Trump has faced and the impact these constraints will have on the economy.
Constraint 1 Complexity of President Trump’s plans
The president’s anti-establishment position and unconventional plans were important factors in helping him win the presidency. Although he has proven to be committed to keeping his promises, the issues addressed have been quite controversial. Health care and immigration policies are good examples of such complex topics. Another difficulty is that President Trump has more experience negotiating with business partners than dealing with the public service. Trying to negotiate health care was one of his priorities. However, there has been much criticism of his approach to the process. He has had greater approval on other fronts, particularly in foreign policy concerning Syria and North Korea, where both Republicans and Democrats have offered more support.
Other agenda points, including reducing the administrative burden of regulation, were received positively. However, deregulation of the financial sector has met with a lot of opposition. At this point, it appears that choices will have to be made and that meaningful policies could be delayed for now. The cut in the corporate tax rate is currently under discussion, particularly for small businesses that constitute a big chunk of tax revenues. In the past, initiatives for a radical tax overhaul have watered down.
Constraint 2 Weak support from government coalition
Another challenge concerns the support from a reliable governing coalition. Since the collapse of the Obamacare repeal, investors have become more sceptical about the Trump administration’s ability to find the necessary support to pass future plans. They are right to be concerned. Following the 2010 elections, the Republicans retook control of the House. Since then, the hard line of the Republican party has shown that they are prepared to go to great lengths in order to achieve their goals. This has been the case with the debt ceiling and government shutdown, as well as other budgetary discussions which sought to achieve changes to federal funding for Planned Parenthood and on immigration policies under President Obama. Meanwhile, Republican voters continue to support President Trump, which makes a case for the president to insist on his campaign promises.
Looking ahead, we think that finding support for budget spending initiatives now and in the future will remain complicated. In the past, obstructing the budget process created opportunities for politicians to create visibility and win government spending for their constituencies. This time essentially it appears no different. The threat of the current government shutdown is evidence of this complexity. In the past days, President Trump’s Administration has reached out to Democrats and it seems that the shutdown will be avoided. The budget deal currently being discussed includes now some priorities from Democrats, the question is whether this will finally get support from the more conservative Republicans. For instance, in the most recent deal, there is more funding for the National Institute of Health and the building of the wall has been left out. This bipartisan strategy suggests that future policies could be more nuanced than the campaign promises.
Constraint 3 Government nominations running behind
Several key figures in President Trump’s administration have yet to be named. The political appointee tracker from the Partnership for Public Service suggests that Mr Trump has made 68 appointments in his first 100 days, compared to 187 made by Barack Obama. However, this has not overshadowed certain critical appointments, including the Secretaries of State and the Treasury, as well as Defence. These appointments have been key to his foreign policy decisions and have been positively received by financial markets. Meanwhile, President’s Trump nominee for US trade representative, Robert Lighthizer, has been held up for months because he represented a foreign government in a trade dispute with the US. Moreover, President Trump, in the past few days, created a White House Office of Trade and Manufacturing, to be headed by Peter Navarro, who has in the past delivered protectionist views. This all suggests that some of the nominations that would influence a more protectionist stance have been delayed, which may not be all that bad.
Financial markets have adapted relatively well to the controversial start of President Trump’s term. Confidence indicators, which were already trending up, received an additional boost, while equity markets have passed several landmarks. The Nasdaq index reached 6000 and the VIX index dropped to the lowest level in three years.
Despite the relative optimism in financial markets, we expect political uncertainty to continue over the coming period. Many of President Trump’s priorities will have to go through Congress, including a new shot at repealing Obamacare, a tax overhaul plan and infrastructure spending. Lifting the debt ceiling for the next fiscal year is another pending challenge. We continue to think that the positive momentum of the US economy will receive an impulse from President Trump’s economic agenda, but that the magnitude of the stimulus has been watered down given the weaker-than-expected political support. As a result, we are less optimistic of widespread fiscal support over the coming years in the form of a tax overhaul, which according to the Administration would allow lower business taxes (15%) and stronger GDP growth (4%). This seems unlikely. However, we see the positive side of a more nuanced approach to a controversial agenda. Overall our base scenario remains benign with GDP growth slightly above 2% and moderate inflation of 2.5% in 2017. This is consistent with the path of GDP growth in 2016, with exception of the first quarters where there seems to be a pattern of weaker growth. This is partly explained by methodological factors and extreme weather.