Wilmington Trust is expecting the economy to pick up under President Trump, as long as his policies aren't “watered down by thrifty fiscal conservatives,” said Wilmington Trust CIO Tony Roth.
This time last year, Wilmington's forecast warned of tepid growth, possibly dissolving into a new recession. This year those negative concerns have been “forestalled,” Roth says in Wilmington Trust's annual economic outlook report.
The forecast and analysts' comments point to many contingencies. “We're entering the most interesting and intense period of our careers," Roth said in a recent press conference.
Describing the Trump administration as "eccentric," Roth said Wilmington has tried to filter out the static and focus on the real impact of the president's proposed policies.
“We're not looking for the most recent tweet, rather what is fundamental,” he said.
Three positive influences on growth this year could add 1 percent to economic activity, according to Wilmington's assessment of Trump proposals:
• A $550 billion infrastructure spending proposal, after a probable haircut, will likely survive with some stimulative fiscal policy change becoming law, Wilmington forecasts. In which case, it expects labor markets, wages and consumer spending will benefit.
• Tax reform would boost capital expenditures, they say, as would a lower corporate tax rate and the repatriation of U.S. corporations' offshore cash. A simpler tax system would hopefully reduce the burden on businesses, they say.
• Reduced regulation also is likely to unburden businesses, including the repeal of the Affordable Care Act and a stripping of restrictions imposed by the Dodd-Frank Act. Anticipation of the latter has already registered on Wall Street, judging by this year's Dow Jones index crashing through the long-sought 20,000 ceiling, according to Wilmington.
On the negative side, “Trump's near-term, pro-growth policies are deficit-financed. These problems will only loom larger,” according to the forecast. Resulting inflation could rise too quickly, triggering “short-term rate hikes and upending the long-standing recovery and slow global expansion.”
The greatest concern is Trump's “saber-rattling on trade,” with China especially subject to “a political miscalculation,” says Roth. The U.S.-China relationship is “more apt to suffer from some form of executive or other type of misstep,” he said. China buys 8 percent of U.S. exports; Mexico, another relationship on the ropes, buys 18 percent.
Trade policy is a key risk, said Clement K. Miller, a portfolio manager for Wilmington, who sees growth opportunities in emerging markets. The U.S. sells more than $150 billion in exports to other countries, the largest single buyer being Canada at 18 percent.
Miller said he is optomistic about EM investment opportunities. The purchasing power of the middle-class has proven sustainable—especially in Asian nations such as China and India, he noted. “China is the poster child for current emerging markets as the largest single source of imports for U.S. consumers in 2015. Threatened tariffs on China would hike prices and threaten consumer spending,” Miller said.
As for Mexico, “Feared retaliations, should Trump set up a U.S. vs trading partners Mexico and China, could result where two players align against the third.”
Wilmington's report also said “rising interest rates will be good for the whole economy.”
