The policy machinations of Washington D.C. will figure very large in the U.S. economy over the next year, both in terms of Trump Administration fiscal policy and the Yellen Fed monetary policy. Nearing the end of its first hundred days, the Trump Administration has fostered a business-friendly environment through the rollback of regulations via executive order. U.S. equity prices responded favorably to the initial steps and overall expectations of the potential Trump Bump on the economy were high. However, the Trump Administration’s first legislative challenge, the rollback of the Affordable Care Act, was successfully thwarted by an unlikely coalition of Democrats and conservative Republicans. Because of the potential tax and deficit implications of the American Health Care Act, it was interlinked with the tax reform and spending initiatives that were to follow. The failure of the American Health Care Act 1.0 to clear the House, much less the tougher hurdle in the Senate, increased doubts about the scope and the success of tax reform and infrastructure programs. Last week, President Trump renewed his public discussion of tax reform and a $1 trillion infrastructure program at the CEO Town Hall. These programs are potential game changers for the U.S. economy. If the Trump Administration can clear the runway with the passage of the American Health Care Act 2.0, and/or achieve a reasonable portion of the tax reform and $1 trillion infrastructure spending packages, then the Trump Bump will give us a significant lift in 2018. We have flattened our near-term GDP forecast and pushed the Trump Bump back into 2018 with the expectation that the Trump Administration will have a least some success with tax reform and infrastructure spending.
This spring has also been an interesting time at the Federal Reserve. New York Fed President Bill Dudley’s Bloomberg interview and the follow-up article in the Wall Street Journal on March 31 gave the public the first glimpse of the Fed’s still-evolving plan for balance sheet reduction. More discussion was released to the public in the minutes of the March 14/15 Federal Open Market Committee meeting. According to the FOMC minutes, the Fed is focusing on a passive reduction in their $4.5 trillion balance sheet by ending the reinvestment of maturing assets, beginning later this year. The ending or phasing strategy could be different for different types of securities. The timing of the change in reinvestment policy could depend on economic and financial market conditions. Also, reinvestment could be restarted if the economy encountered significant adverse shocks. It was noted in the minutes that the FOMC would continue to discuss balance sheet policy during upcoming meetings. One possible strategy for the Fed would be to raise the fed funds rate range two more times this year, once on June 14, and then again on September 20, and then keep interest rates unchanged through the end of this year as the Fed initiates balance sheet roll-off.
Most U.S. and international economic data continues to be healthy. However, despite other strong labor data, the official payroll job count for March showed a weaker-than-expected gain of 98,000 jobs. The separate household survey of employment, which feeds into the unemployment rate calculation, posted an outsized gain of 472,000 jobs, bringing the unemployment rate down to a tight 4.5 percent, the lowest since May 2007. The Fed will see two more monthly jobs reports before the June 13/14 FOMC meeting, when we expect them to next raise the fed funds rate.
For a PDF version of the complete Comerica U.S. Monthly with additional commentary, tables, and charts, click here: US_Economic_Outlook_0417.