What to Expect in the Trump 2.0 Economy
A result that was validating to many, heart-wrenching to others, and surprising to more than a few, Donald Trump will once again be president of the United States. Plenty of soul-searching manifestos have been published over the past few days about where Democrats went wrong and what this Trump victory means for the country and the world. This is not one of those finger-wagging pieces, however, or some deep reflection about the state of play. After all, as Ben Franklin once said, “Any fool can criticize, complain, and condemn. And most fools do.”
On the topic of the economy, no one actually knows exactly what will happen four months from now let alone four years or more into the future. Yet there are things we can look at, and consequences of policies. So for today, I wanted to offer an initial assessment of what we can expect for the economy under the second presidency of Donald Trump, keeping in mind a second and more famous Ben Franklin quote, the only things certain are death and taxes (although I will talk about taxes below).
Among the myriad of challenges President Trump will face, however, includes the astonishingly high expectations many of his supporters have about his perceived masterstroke ability to lead this economy. President Obama and other president-elects have experienced it similarly - soaringly high expectations among supporters that will be difficult if not impossible to meet.
Inflation
Inflation consistently polled as one of the top issues on voters’ minds this year, and it is no surprise why: people hate inflation, which Ronald Reagan famously called a tax on the poor. The tough irony for Kamala Harris and the Democrats is that the roots of the current inflation mess started during the first Trump administration. COVID-related supply chain issues were a big part of it, but so too were the massive stimulus programs including PPP loans and others, much of which was hatched and launched during the first Trump presidency (although with the help of Congress, not via President Trump alone). Although Biden and other officials were slow to recognize how impactful inflation was and how non-transitory it was going to be, blame always goes to the one in office at the time when people are most angry, and voters took their anger out on Kamala Harris, representing the party in power.
The cruelest of ironies for Democrats, however, is the inflation is now nearly under control! The latest CPI Report showed inflation running at a year-over-year rate of 2.4%, just a notch above the Fed’s stated goal of 2.0% inflation. You can bet that as soon as Donald Trump takes office, the Republican tune on inflation is going to change as they immediately take credit for a more stable inflationary environment. This will be right about the time that Americans’ acquiescence on the high price of groceries, eating out, utilities, etc., starts to settle in. President Trump should enjoy a honeymoon on the inflation front as these variables coalesce.
The better question, however, is what will be the impact of Donald Trump’s policies on inflation going forward. And there is a lot of potential kindling for the inflationary fire, for sure. For starters, he has called “tariff” the “most beautiful word,” and has proposed tariffs of 10-20% on incoming goods to the United States. Traditional economic theory holds that tariffs are inflationary because they increase the price of goods. After all, the cost of the tariff if not necessarily borne by the country in which the product originated or by the company that produced it, but by the consumer who ultimately purchases it.
But let’s give this an honest look. Trump doesn’t do anything by the traditional book, and as much as tariffs became a key part of the campaign this summer and fall, it is worth noting that while Biden and Harris consistently criticized Trump's trade policies, the Biden Administration largely maintained the previously established Trump tariffs, especially those related to China and on steel and aluminum. I may come back to tariffs as its own topic at some point in the future, because there is more interesting context and nuance here that is beyond the scope for today.
The paradox of inflation is that reining it in often means contracting the economy or at least slowing the rate of growth, two things that Trump has been clearly reluctant to do. Influencing interest rates, a more generous tax structure especially for the wealthy, a more permissive environment on mergers and acquisition, government spending on everything from necessary infrastructure to pork barrel giveaways: a lot of that is inflationary in nature, so there is a true risk that Trump inherits what has become a fairly stable landscape on inflation and fires it back up in the wrong direction.
The Stock Market
Stocks made a big jump on the day after the election. Major indexes were up 2-3+%, with shares in certain industries like banking up over 10%. Why? Clearly investors are enthused about pro-business policies in a Trump Administration. There is an expectation of a looser regulatory environment, a more permissive attitude towards mergers and acquisitions, fewer concerns about monopolistic behaviors, and the prospect of a president who will use the bully pulpit to force interest rates lower in order to drive growth, among other factors.
Will all of that hold up? Well, there is no doubt about it, the policies of the Trump Administration will be different than those of either the Biden or would-be Harris Administrations. One particular thing to watch is who Trump nominates to be the Chair of the Federal Trade Commission. The current Chair, Lina Kahn, has been known for a firm stance on antitrust laws, which aim to protect consumer rights and curb corporate power. She has faced significant pushback from the tech industry, which may be why so many tech leaders including Elon Musk, Peter Theil, and Marc Benioff supported Trump this time around. You can bet your last share of Amazon stock there are many in the tech community who are eager for a temperature change at the FTC. I would wager that is the exact reason why the Washington Post chose not to endorse Kamala Harris right before the election. Who owns the Washington Post? Jeff Bezos, the founder of Amazon and its largest shareholder. I imagine Bezos did not want to stick his head out of the sand any further than it needed to be in the face of a potential new president who is known for holding grudges and exacting revenge.
Interest Rates
As noted above, Trump has advocated for lower interest rates as a means of stimulating growth. He did criticize the Fed for lower rates by 50 basis points in September, however, calling it a political stunt. Nonetheless, it is likely Trump will use his influence to the extent possible to push for lower rates.
The president does appoint the Chair of the Federal Reserve, who serves for a four-year term, although the Fed is meant to be independent of politics including presidential pressure. Fed Chair Jerome Powell’s current term is set to run through February 2026. Although it is possible for the president to remove a Fed Chair, it is only meant to be possible in the case of misconduct and not merely due to policy differences. In fact, no Fed Chair has ever been removed from office. When a reporter asked Chair Powell this week if he would resign now that Trump has been elected, as has been suggested by some Trump supporters, Powell gave a one-word answer: no. The dance and jockeying between Trump and Powell over the next two years will be interesting to watch.
Taxes
It’s hard to predict exactly what Trump will do on taxes because his policies and ideas are pretty vague and somewhat meandering, to put it kindly. Conventional wisdom is that Trump’s tax plans will be more advantageous for the wealthy, although he also campaigned on eliminating taxes for tips and overtime.
One of the notable legislative achievements in the first Trump Administration was the passage of the Tax Cuts and Jobs Act of 2017, which conventionally became known as the Trump Tax Cuts. Among other things, this act reduced the corporate tax rate, reduced the highest marginal personal income tax rate from 39.6% to 37%, significantly increased the estate tax exemption, and boosted the standard deduction. Much of this is set to expire in 2025. Trump and his team have indicated they plan to extend and expand these tax breaks.
What Comes Next
There are many more variables at play and economic topics worth following. Trump campaigned on massive deportations, for example. It remains to be seen whether this was just political grandstanding, or if there is even a logistical way to carry out the more extreme versions of what Trump and his allies have been suggesting. You can bet that will have an economic impact, however. For better or worse, massive swaths of industries including construction and more rely on cheap labor. Once that impact starts to hit the bottom line of America’s business class too directly, I’m willing to be there will be a softening on the language of deportation.
Plenty of other topics, each of which could be their own full article, are worthy of our attention in the months and years ahead. Climate, for example, did not appear much on the campaign trail this year, but the economic impacts of more intense and more frequent storms are going to be even more significant in the years ahead.
Here is the bear case for a Trump economy: political influence over interest rates leads to overheating and inflation, tariffs lead to higher prices at home and trade wars abroad, and the gas tank that has been fueling the stock market over the past several years finally runs dry. As growth slows, businesses not only cut back on hiring but begin to lay people off in high numbers, leading to a contagion effect throughout the overall economy as the cycle of earnings and spending reverses. Further tax cuts boost corporate profits with marginal benefits to the most wealthy, but cost the country trillions in lost revenue. (Indeed, the non-partisan Congressional Budget Office estimated that the 2017 Trump tax cuts would add $1.9 trillion to the Federal deficit over ten years). This all occurs under the specter of the general instability of the Trump way of doing things, an instability that is not a symptom of the brand but a feature of it.
The bull case is that a less stringent regulatory environment, a more permissive and supportive attitude towards business growth, and lower tax rates will lead to growth and prosperity. Corporations thrive, investment and hiring expands, and wages rise as the nation experiences an economic surge. Tax cuts, while costing the government revenue, bring in new revenue by virtue of all the added economic activity that will take place, and the tariffs do not cost Americans as much as expected and any downside is realized back through the return of American manufacturing from overseas.
So what is actually going to happen? The truth is, no one knows. I could give you an absolutist statement choosing either the bear case or the bull case above, shout it from the rafters, do my own little media circuit on the topic as an “industry expert” and probably build a great following of like-minded people. Indeed, it is a pretty profitable route to build a media career off of choosing one side of an argument and ignoring the nuance of the other, not to mention casting aside the inherent uncertainty and risk in any economy including risks we don’t even know about yet. No one predicted the pandemic, for example.
I will predict one thing that will not happen: any sort of notable cut in government spending. Whereas traditional conservatism would call for smaller government, and while there have been various ideas bandied about including making Elon Musk some sort of efficiency czar, it won’t happen. Americans (and their elected officials) like the idea of cutting spending, but they don’t actually like to make the hard choices of what to cut. Everyone wants less wasteful spending, but no one wants to cut spending on Social Security or Medicare, for example, or defense spending, which are the biggest ticket items in the federal budget.
One final thought: not only did Trump win the presidency, but Republicans took control of the Senate and may have control of the House of Representatives once a few final races are called. They are going to control it all. If things go well, they will take credit. If things do not, there will, in theory, be no one else to blame. It’s the Republicans ballgame now, and time will tell how it plays out.
Expectations among Trump supporters are high, as they always are among the voter base of the victorious party. I remember seeing an interview with one supporter on Election Night who said something like, “People are going to be richer, happier, safer. It’s going to be great.” All of that is easier said than done. And while there are divergent views on the state of the current economy, which I wrote about just last week, Trump is inheriting a stock market at an all time high, an unemployment rate near historical lows, and inflation near 2.0%. To paraphrase Ben Franklin one more time, that’s a good economy….if you can keep it.
Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com.