So far, Trump appears likely to cut taxes, roll back regulations on business and invest in roads, bridges and other infrastructure, which should deliver an economic stimulus.
But Luke A. Tilley, chief economist for Wilmington Trust Investment Advisors, Inc., also cautioned those attending The Manufacturers’ Association’s finance forum that Trump’s proposed trade positions, for example, could ding consumers, investors and the economy as a whole.
“There is no single example of a country in history that tried to retract from the world and ended up doing better over a 40- to 50-year period,” Tilley said, referencing Trump’s protectionist trade stances.
Among those stances, Tilley noted, are Trump’s proposal to impose a 45 percent tariff on Chinese imports, as well as his criticism of the North American Free Trade Agreement. Trump has suggested he would consider pulling out of NAFTA, a trade deal between the U.S., Canada and Mexico.
Canada and Mexico are America’s two largest export markets, Tilley told the audience, with China No. 3. Combined, they are the destination for 42 percent of U.S. exports, totaling $632 billion in value in 2015.
China, meanwhile, is the largest source of imports to the U.S.
Trump’s policies, if enacted, would therefore pinch manufacturers and shoppers, Tilley said. They would add to consumer prices, and are likely to lead to declines in consumer spending and higher inflation, Tilley said.
“Go walk around (U.S. retail) stores and turn stuff upside down and see if it says made in China on it,” Tilley said.
“Your bill at Target might not go up 45 percent, but it would go up a lot, and that would sap consumer spending a lot. That’s not a political statement, that’s economics.”
Wilmington Trust, where Tilley works, is the investment arm of Buffalo, N.Y.-based M&T Bank.
As a member of Wilmington Trust’s Investment Committee, Tilley develops forecasts of the U.S. and international economies, and researches emerging issues to support the firm’s investment strategy. He also is responsible for communicating the economic outlook and investment strategy to clients and the public.
Before joining Wilmington Trust in 2015, Tilley was an officer and economic advisor with the Federal Reserve Bank of Philadelphia. Earlier in his career, he worked as a senior economist at IHS Global Insight and as an economist for the U.S. Department of Housing and Urban Development.
The York-based Manufacturers’ Association serves nearly 350 member companies in Pennsylvania and Maryland, offering benefits such as employee education, training and workforce development, group benefit insurance, professional HR and search services and networking events.
Tilley explained that the outlook before Nov. 8 already had some bright spots:
• Estimates for 3rd quarter GDP growth were coming in at 2.9 percent — “not very strong, but an encouraging bounce” from previously weak readings.
Overall GDP forecast had been 2.5 percent, but climbed to 3.5 percent post-election.
• Job growth for October was 161,000, which was higher than the 150,000 they predicted.
Job growth has been settling in at about 150,000 per month, he said, and the past 12 months brought 2.4 million new jobs to the country — lower than the 3 million of 2014-15, but still healthy, he said.
If anything, Tilley said, job growth has slowed because the labor market has tightened overall.
“Hiring has slowed down significantly because there are less people out there available to hire,” he said.
Much of that growth has been in the service sectors, U.S. Bureau of Labor Statistics data show, however.
• On related notes, average hourly earnings in October were up 2.8 percent, the highest growth rate since June 2009. Unemployment, meanwhile, was down to 4.9 percent.
• Consumer Price Index inflation was expected to continue moving up; October’s figure was 1.6 percent, the highest since October 2014.
• A significant drop in oil and gas prices helped drive inflation down in 2014-2015, boosting consumer spending. But oil is up again this year and gas has been essentially flat for about a year. Those factors are expected to push inflation up again in early 2017.
• Consumer spending helped drive the post-recession recovery, but Tilley said analysts are watching for a “passing of the baton” to more business investment. He pointed to statistics which show that manufacturing orders are recovering for the nation overall.
• Tilley provided statistics for the York-Hanover Metropolitan Statistical Area, which showed that unemployment, which had dipped below 4 percent in 2015, climbed somewhat and is hovering around 5 percent. That, he explained, actually is good for the labor market, for two reasons — first, it’s not entirely due to layoffs, but also due to individuals who are actively seeking work now but may not have been before. And, it means there are bodies available to fill other openings in this tight labor market, Tilley said.
Total nonfarm job growth in the region for the year ended in September was 1.4 percent, although manufacturing was down 0.3 percent.
Broadly, these trends were expected to continue into 2017.
So, what does the election do to that picture? Tilley admits it’s not entirely clear. In the short term, he said, “you don’t really know,” in part because Trump’s policy plans aren’t entirely clear.
But he was able to make some predictions about what could happen:
• There is a high probability that pledges of corporate tax reform will be pushed through, in part because this is a program Congress already has been examining and preparing for, Tilley said. That could include reducing the corporate tax rate from 35 percent to between 15 and 20 percent, and elimination of the corporate alternative minimum tax.
On that, Tilley had a clear warning.
“These come at the cost of incredibly higher deficits and debt in the long term, if you don’t pair it with something else,” he said, meaning spending cuts or added revenue.
“Nothing is free,” he said. “It’s the first lesson in economics. You can’t do the tax cuts now and not expect there to be a cost later on.”
“I’m not saying you shouldn’t do it,” Tilley added, just that the trade-offs must be acknowledged.
• Regulatory reform — healthcare, financial, energy and other areas — also has a high probability of happening, as it largely requires executive action.
While not taking a political stance on such regulations, Tilley acknowledged that they can limit growth, and so some will see their removal or loosening as positive for the economy.
• Individual tax reform and infrastructure spending face only a moderate probability of implementation, Tilley said, as both areas will require broad agreement between the White House and Congress, and thus could be subject to more substantial political pressure.
Still, tax cuts could help drive consumer spending up, while new policies could help boost business investment, he said.
• Long-term, Tilley also warned that serious action must be taken to address the nation’s growing debt and the future of Social Security and Medicare, and that Trump’s policies could exacerbate those issues.
With no changes in the current laws, the nation’s debt to GDP ration will continue to rise, he said.
Trump’s policies, just on their own, would increase the debt over 10 years by $6 trillion to 7 trillion, “making a very bad situation worse,” Tilley said.
Even fairly conservative estimates suggest Trump’s policies could create a $2.5 trillion hole, Tilley said.
And deficit spending is likely to push inflation expectations higher, he said.
• But it is Trump’s trade policies which have garnered the biggest headlines and to which Tilley devoted much consideration at the end of his lecture.
The international trade outlook under Trump is uncertain, and therefore a risk, he said.
Tilley acknowledged that the price of international trade can be the pain of localized job losses in the short-term, but suggested that the benefits in the long-term can be greater, including the switch to manufacturing more complex and profitable items — but that requires retraining of the workforce, something he sees as essential.
“I’m not saying we need to have completely free and open trade and never tax anything,” Tilley said.
“I don’t think that the answer is building up barriers and trying to do everything inside your own country.”