Friday, December 9, 2016

"Trumponomics:.....," UCLA Economic Letter, December 2016

This article is a different version of the previous post on Trumponomics. Although shorter, many of the charts are available to view. You can access the article at the link below:

Thursday, December 8, 2016

First Pass at Trumponomics: From a Reckless Monetary Policy to a Reckless Fiscal Policy, UCLA Anderson Forecast, December 2016

First Pass at Trumponomics: From a Reckless Monetary to a Reckless Fiscal Policy
David Shulman
Senior Economist, Senior Economist UCLA Anderson Forecast
December 2016

Contrary to prior expectations, stocks soared and interest rates surged on the election of Donald Trump. (See Figures 1 and 2) It seems that both the stock and bond markets were pricing in the radical reversal in fiscal policy occasioned by his election while ignoring the negative impacts of his immigration and trade policies. Put bluntly the markets are now anticipating stronger real growth, at least for a while, higher inflation and higher interest rates. We believe that the markets have got it right with respect to direction.

Figure 1. S&P 500, Nov. 26, 2015 – Nov. 25, 2016, Daily Data

Source: Standard and Poor’s via

Figure 2. 10-Year U.S. Treasury Bond Yield, Nov. 26, 2015 – Nov. 25, 2016, Daily Data

Our first pass at Trumponomics, which still remains quite vague, makes the following policy assumptions:
·        $300 billion/year annual mostly higher end personal tax cuts effective in Q3.
·        $200 billion/year corporate tax cut effective in Q3 with $50 billion of revenues associated with the repatriation of foreign earnings that quarter.
·        $20 billion/year infrastructure program effective in Q4.
·        $20 billion in higher defense spending in 2018.
·        $20 billion/year Medicaid/ACA cuts effective in Q4.
·        Relaxed energy, environmental and financial regulation.
·        Modest changes to immigration except for border wall/fence.
·        Modest changes to trade policy yielding net reductions in food and aircraft exports phasing in starting mid-2017.

The net result is a massive fiscal stimulus on an economy at or very close to full employment and is directionally what a host of liberal economists have been advocating for the past five years. To be sure the mix tax cuts and spending is far different from what they desired, but make no mistake this is real or even reckless fiscal stimulus. How so? The federal deficit will roughly double to over one trillion dollars by 2018.  (See Figure 3) Simply put an economy operating at full employment should not have a deficit equal to 5% of GDP; the budget should be in balance or in surplus. Thus in the next recession the federal deficit will make the deficits associated with the financial crisis look small. In a way policy going policy will be the mirror image of the past five years as the reckless zero interest rate/QE policy gives way to its fiscal equivalent. Further Europe will follow the U.S. with more aggressive fiscal policies to meet the growing populist challenge.

Figure 3. Federal Deficit, FY2007 -FY2018F

Sources: Office of Management and Budget and UCLA Annual Forecast

In response to higher inflation and the exploding federal deficit the long quiescent Fed will become more aggressive with respect to monetary policy. This month’s expected increase in the federal funds rate will be followed up with many more pushing the rate up to above 2% by the end of 2017 and above 3% by the end of 2018. (See Figure 4) Remember President Trump has two vacancies to fill right away and Chair Yellen’s term expires in January 2018. Trust me; we will have a much different Fed under President Trump. Similarly the yield on 10-year U.S. Treasury Bonds is forecast to exceed 3% by the end of 2017 and 4% by the end of 2018. We know this sounds aggressive but it looks like we are in for, what economists call, a regime change.

Figure 4. Federal Funds vs. 10-Year U.S. Treasury Bonds, 2007Q1 -2018Q4F
Sources: Federal Reserve Board and UCLA Anderson Forecast

With $500 billion in tax cuts arriving in the third quarter of 2017 we expect economic growth to accelerate from the recent 2% growth path to 3% for about four quarters. Thereafter growth will slip back to 2%. (See Figure 5) Why so little? First it is hard to stimulate an economy operating at about full employment and second the higher interest rates we foresee will begin to bite. In order to maintain 3% growth or higher the economy will need a productivity miracle. Whether that will come from as the Trump partisans expect the supposed supply side effects of the tax cuts and the proposed regulatory reforms remains to be seen. We would also note that our forecast is likely higher than what Trump’s Democratic opposition would expect.

Figure 5. Real GDP Growth, 2007Q1 -2018Q4F, Percent Change, SAAR
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

In this environment employment will continue to grow with job growth on the order of 140,000 a month in calendar 2017 and 120,000 a month in calendar 2018. (See Figure 6) To be sure if the new administration follows through with its campaign rhetoric to engage in mass deportations then job growth and the economic activity associated with it would be far slower than what we forecast. The unemployment rate is forecast to fall to around 4.5% by the end of 2017 and remain there through 2018. (See Figure 7)  Further as the labor market tightens wage growth will accelerate to 4% or more from the middle of 2017 on. (See Figure 8)

Figure 6. Payroll Employment, 2007Q1 – 2018Q4F
Sources: Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 7. Unemployment Rate 2007Q1 – 2018Q4F
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 8. Compensation/Hour, 2007Q1 -2018Q4F
Sources: Bureau of Labor Statistics and UCLA Anderson Forecast

With year over year core inflation already rising above 2%, it should no surprise to anyone that this rate will accelerate to at least a 2.5% pace; a forecast we view as conservative. (See Figure 9) As oil prices rebound headline inflation will approach 3%. Therefore if we are roughly right about the economy operating at full employment with an unemployment rate of 4.5%, inflation exceeding 2.5% and the prospect of a one trillion dollar annual federal deficit, it should surprise no one that interest rates would be heading much higher.

Figure 9. Consumer Price Index, Headline vs. Core Inflation, 2007Q1 -2018Q4,

The Good, the Bad and the Ugly

The Good

The economic growth we envision will be powered by rising consumption, equipment and defense spending. Real consumption spending is forecast to increase at 3% and 3.7% in 2017 and 2018, respectively compared to 2.6% this year. (See Figure 10) Consumption growth will dampened by an increase in the saving rate as high end consumers stash some of their tax savings and benefit as well from the rise in interest rates. (See Figure 11) The saving rate rises from 5.7% in 2016 to 7.6% in 2018.

Figure 10. Real Consumption Spending, 2007 -2018F, Percent Change, Annual Data
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 11. Saving Rate, 2007 – 2018F
Source: U.S. Department of Commerce and UCLA Anderson Forecast

Responding to lower corporate taxes and the likelihood of 100% expensing for tax purposes equipment spending is forecast to rebound from a 2.2% decline in 2016. Although we maybe on the conservative side here, we are forecasting increases of 4.5% and 6% in 2017 and 2018, respectively. (See Figure 12) Although the Trump plan includes 100% expensing for buildings along with the elimination of the business interest deduction, we are not sure this part of the plan will be enacted. This aspect of his plan raises a host of issues to geeky to discuss here.

See Figure 12. Real Equipment Spending, 2007 – 2018
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

We have been forecasting a turnaround in defense purchases over the past two years. With the election of President Trump it is upon us. After declining six years in a row real defense spending is forecast to increase by 0.8% and 3.2% in 2017 and 2018, respectively. (Figure 13) This is one spending priority that is expected to achieve broad support.

Figure 13. Real Defense Purchases, 2007 – 2018F, Percent Change, Annual Data
U.S. Department of Commerce and UCLA Anderson Forecast

The Bad

Housing activity will likely be a casualty of the economic environment we envision. The speed of the recent spike in long term interest rates and the prospect of further increases will dampen housing demand. Instead of the 1.4 million level of housing starts that we were previously looking for in 2017 and 2018, we are now looking for a far more modest level of starts in 1.2 million – 1.25 million range. (See Figure 14) To be sure this is an increase from this 2016’s estimated 1.17 million starts, but far below what we perceive to be underlying demographic demand of 1.5 million units per year.

Figure 14. Housing Starts, 2007Q1 -2018Q4F
Sources: U.S. Bureau of the Census and UCLA Anderson Forecast

The Ugly

Although President-elect Trump raged against imports and the trade deficit during the campaign, it looks like he will come up woefully short. Why? The consumer boom that his tax cuts will ignite will inevitably suck in imports. Further the change in policy mix from monetary policy to fiscal policy triggered a rally in the dollar making imports cheaper and exports more expensive. Recall where we started, we are not assuming a major trade war with our partners around the world.  If we are wrong here we are likely wrong everywhere. We are assuming that there will be minor tweaks to trade policy that would modestly reduce imports (mostly in the auto sector) and trigger modest retaliatory actions affecting aircraft and farm exports. As a result imports continue to rise and exports flat-line. (See Figure 15 and 16)

Figure 15. Real Imports, 2007 -2018F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 16. Real Exports, 2007 -2017F, Annual Data, Percent Change
Sources: U.S. Department of Commerce and UCLA Anderson Forecast 

The slowdown in trade that we envision is, unfortunately, only the beginning as the broad postwar consensus favoring open markets has broken down. The bi-partisan collapse of the Trans Pacific Partnership (TPP) and the Brexit vote signaled that we are moving to a more protectionist world and the age of ever increasing globalism is over, at least for now. The world will be a poorer place for it.

A Note on Infrastructure Spending

We do not believe that President-elect Trump’s tax credit based infrastructure plan will pass muster in Congress on the scale he is looking for.  Simply put he is proposing $137 billion in tax credits for private investors to fund major infrastructure projects. The problem is that in order for this to work it requires a revenue stream and there aren’t any revenue streams associated with highway, bridge and tunnel, wastewater and transit maintenance. Thus we anticipate a more traditional infrastructure program amounting to a more modest $20 billion dollars a year of direct taxpayer funding.  We could very well be low here, but it will take time for an expanded infrastructure program to ramp up.

Nowadays as President Obama discovered to his chagrin there are very few “shovel ready” infrastructure projects around awaiting funding. We live in a world of environmental impact studies and Davis-Bacon Act labor codes regarding prevailing wages. Thus if the President-elect wants quick action Congress would have to waive or fast-track the environmental requirements and waive provisions of the Davis-Bacon Act. This would be a tough sell for the Democrats, but the Republicans are in the majority.

A Note on the Deficit

Several my colleagues have cautioned me about the so-called “deficit hawks” in the Republican Party who would fight fiercely against the projected one trillion dollar deficit we are calling for in 2018. My response is that the Republicans want Trump to succeed and they won’t fight him. This is very similar to the evangelical wing of the Republican Party holding its nose and supporting Trump, whose life story certainly raised serious questions for that faction, in the general election against Hillary Clinton. Moreover the Trump Republican Party is not the party of Reagan; it is more a Jacksonian working class party that cares more about jobs than deficits.


The election of Donald Trump signaled a major regime change in economic policy. We are transitioning form a reckless monetary policy to a reckless fiscal policy. In the short run that will bring with it more real growth and inflation along with higher interest rates. However, because the economy is operating at or close to full employment, the growth spurt will be short-lived and we will return to the 2% growth economy of the past seven years. However we will be left with mega-deficits that will make it more difficult to fund the retirement and health programs that voters expect.  And the real risk is that a more aggressive Trump Administration trade policy would trigger a growth killing trade war. Thus we would caution that because there are so many ill-defined moving parts there is higher degree of uncertainty in this forecast compared to prior ones.

Wednesday, November 30, 2016

Carrier Capitalism

According to very reliable press reports United Technologies, the parent corporation of Carrier, has promised the incoming Trump Administration to remain in Indiana instead of moving its heating equipment parts facility to Mexico. From a political standpoint this represents a "YUGE" victory for Donald Trump. Simply put, he promised to save the approximately 1000 jobs and he delivered.

In exchange for staying United Technologies relied on the promise of fundamental tax reform being offered by President-elect Trump and a modest amount of tax incentives offered up by Indiana Governor and Vice-President-elect Mike Pence. This act will certainly put Congress under the gun to act on his proposal. What is left unsaid is the fact that United Technologies does about $6 billion worth of business with the Department of Defense. It certainly wasn't worth it for them to get off on the wrong foot with the new administration.

What is troubling about the whole transaction is the direct involvement of the incoming administration to get involved in what is essentially a private decision. Is this a one-off event or will we see a line-up of corporations announcing moves to Mexico in order to extract concessions? What we have here is the President-elect acting as a governor. Governor's do this all of the time for the benefit of the corporate sector at the expense of the taxpayer. "Crony capitalism" if you will.

My guess is that it won't be the first time and we will see President-elect Trump with his gazillionaire cabinet acting as a Jacksonian tribune of the people. But make no mistake, politically it was brilliant. 

Tuesday, November 22, 2016

The Coming Political Realignment

You have got to give Donald Trump credit. He destroyed the two reigning dynasties in American politics; the Bushes and the Clintons. He is now in the process of destroying the hollowed out shells of the Democratic and Republican parties. By the end of his term there could very well be two Democratic parties. A social democratic one headed by Bernie Sanders and Elizabeth Warren based on hostility to capitalism, an expanded welfare state and identity politics. The last of which can be viewed as fundamentally anti-American in the sense that it rejects our national motto, “E Pluribus Unum,” which means “out of many one”.  This faction is open to unskilled immigration, anti-trade and isolationist with respect to foreign policy.

I would characterize establishment wing of the Democratic Party, formerly headed by the Clintons as Left Hamiltonians. The favor big government but are friendly to finance, Hollywood and Silicon Valley. They favor open trade, an internationalist foreign policy, high skilled immigration, the regulatory state and thoroughly believe in the educational meritocracy that by and large runs the country. To them Trump is the ultimate outsider. My question is will they remain in what will be a very left wing Democratic Party with its hostility to the elites that they are?

On the Republican side we now have a very populist Jacksonian party that is hostile to nontraditional lifestyle choices, trade, immigration and foreign entanglements. It supports the existing entitlement programs and is voice of dispossessed white people who now believe that they are a minority group and are voting as such. They too are hostile to E Pluribus Unum. It was these voters that elected Donald Trump. To be sure there racism is present, but the grievances are real as they are looked down upon by the elites of both parties. On economic issues they are closer to the social democratic wing of the Democratic Party than the establishment Republicans, a fact highlighted by Donald Trump during the campaign.

I would characterize the establishment wing of the Republican Party, now a shell of its former self, as Right Hamiltonians as typified by House Speaker Paul Ryan. They favor big government where it can help big business, low taxes, open trade, high skilled immigration, and an internationalist foreign policy. They have more in common with the Left Hamiltonians in the Democratic Party than they do with the Jacksonians that are now running their party. The basis of a new party can be formed here similar to the way the Northern Whigs and the anti-slavery Democrats merged to form the Republican Party in 1854.

There is also a Jeffersonian wing in the Republican Party. They are called libertarians who favor a small government, an isolationist foreign policy and are wide open to the life style choices people make. It isn’t clear they have a home in the newly constituted Jacksonian Republican Party.

So fasten your seat belts, we are in for a wild ride over the next four years!

Friday, November 11, 2016

My Letter to The Wall Street Journal on Monopsony Labor Markets, Nov 11

Jason Furman and Alan Krueger ought to look in the mirror. The Affordable Care Act, which both authors supported, triggered a host of hospital mergers, thereby creating monopsony power in many local health-care markets.

The link is here:

Wednesday, November 9, 2016

After Action Report on the 2016 Election

WOW! Confounding all of the pollsters and the experts Donald Trump has become the President Elect. He relied on the voters willingness to "stick it to the man" (the global elite), the emergence of a bloc of white voters who acted as an "oppressed" minority, and he did much better than expected with suburban and Hispanic voters. Simply put nationalism is back. For whatever reason the Trump campaign sensed an opportunity in the upper Midwest and pounced. If anything this election represented a big loss for high-priced political consultants.

Shulmaven's forecast was pretty close we had Clinton winning on the electoral college by 288-250. We had Michigan going for Trump, but Florida going for Clinton. That was are big mistake because with Florida Trump in our model would have ended up with 279 electoral votes. It now looks like he will get around 300. We had Clinton winning the popular vote by 3 points; she will end up winning it by 1 point.

We were very close to the mark with the House and Senate races. We had the Republicans ending up with 51 seats; it now looks like they will have 52 or 53 seats. In the House we had the Republicans losing 12 seats which is about double the 6 or 7 seats they will end up losing. Not bad.

Where we are most surprised we thought there would be a major stock market sell-off. We got that overnight, but as of 11AM Eastern Time, stocks are off modestly with the bond substitutes, hospitals and auto parts suppliers bearing the brunt of the selling while defense, infrastructure and pharmaceutical stocks are soaring. I guess the market believes that Trump's reckless fiscal policy will be pro-growth and his barks on trade and immigration are just that with no follow through.

We will have more comments later in the week.

Sunday, November 6, 2016

Election Forecast: Clinton Wins, Republicans Hold Senate and House

It is going to be a long night. My best guess is that Clinton will beat Trump in the popular vote by 3 points, 48.5 - 45.5 with Johnson and Stein getting 4% and 2%, respectively. The electoral college could very well end up being a squeaker with Clinton beating Trump 288-250. Why so close? If I am right about Clinton's 3 point margin, which is somewhat above the polling averages, then California will account for the entire margin of victory. Using simple math with Clinton carrying California by 20 points and California accounting for about 15% of the popular vote; then by simple multiplication you get 3 points. That means the rest of the country will be tied.

How I get to 288 for Clinton is that I give her Nevada and Florida, but I give Trump Ohio, North Carolina and in two upsets I give him New Hampshire and Michigan. Question: why are Obama, Hillary and Bill visiting Michigan tomorrow? Trust me, it is not for the mid-Fall weather.

As far as the Senate goes, with Trump not collapsing the GOP has a real chance to hold on. There are going to be more than a half dozen very tight races so the margin for error is large. My central tendency is for the Republicans to hold the Senate by a razor thin 51-49 majority. The only sure loser the Republicans have is Mark Kirk in Illinois. Now if Clinton wins by 5 points, the Democrats will take the Senate by something like 52-48. 

As far as the House goes it now looks like my fears of a few weeks ago that the Democrats would take the House were unwarranted. Again assuming a 3 point victory for Clinton, the Republicans figure to lose about a dozen seats ending up with a 234-201 majority. And because the Republicans are the "stupid" party they will immediately squander their victory by having a leadership fight. A fitting coda for the ongoing collapse of a party that had victory on a plate and it nominated the only candidate that could lose to Clinton.

Correction and Addendum

California accounts for 10% of the vote not 15% as stated above. Thus with Clinton carry California by 20 points her margin of victory in the rest of the country would be 1 point. Not zero, but very close. In 2012 President Obama beat Romney by 5 points with 2 of those points coming from California. Thus if his margin of victory was only by three points with California being roughly unchained, we might now be witnessing Mitt Romney's reelection campaign.