Economic impact of Trump Administration

Many of us are planning for 2017 and the election results are certainly going to impact strategies for years to come.  At this point it might be best to plan what if scenarios as the Trump administration is selected, confirmed, and starts to execute their strategy.  In reality we are seeing a massive change in global policies which started with the Brit exit, USA elections, upcoming elections and change in France, Italy and in Germany.  At this point for better or worse it is safe to say that “globalization” as defined under President Obama is dead.  We are going to see a relatively rapid change in direction.  Like an aircraft carrier traveling at full speed that makes a 90 degree turn it is going to create some waves.  This blog will take a look at what some of these changes might look like.

Dodd – Frank

This sweeping bill includes many changes beyond banking regulations.  Some of those regulations will most likely stay as it relates to corporate disclosures on executive compensation and other items.  My sense it is safe to say bankers will see fewer regulations that are suffocating the industry leading to increased lending in general.  M & A transactions may see an increased appetite as it relates to debt ratios.

Interest Rates

We have all read the changes in bond prices following the selloff of government bonds around the globe since the election.  The Trump administration has made it crystal clear they are not in favor of ultra-low interest rates.  The Trump administration is looking to kick start the economy from its low growth era.  As this aircraft carrier turns it is going to create a substantial wake and increased cost of capital is going to be one of them.  Rates will most likely rise more rapidly than we have seen in the last decade or more.  Everyone is looking into their crystal ball for the answer.  My ball is blank and does not have the answer.

What I can provide is information provided by the Atlanta Fed in a presentation a year ago.  Growth over 2% will be meet with increased rates.  As in past years the 3rd quarter growth in 2016 was above 2% after a very slow start to the year.   We all expect a December increase in rates.  The question is what about 2017 and 2018.

If it was me I would be looking at planning on increases.

Commercial real estate:

Commercial real estate has been a hot spot for some time with values driven outside of fundamentals.  Values in some markets exceed 2008 levels which will create challenges for properties that cannot increase rents to offset interest costs.

A friend who is a successful small developer has sent eight of his properties to his mortgage broker for new pricing with an eye toward fixed pricing.   He is hoping inflation will drive rents.

It is my guess that some in this sector will catch the wake broadside creating turbulence and opportunity for others.

Residential Real estate:

Today’s WSJ (11/30) had a piece on residential real estate values.  The good news was that the national average returned to the low point in 2011 / 2012.  The bad news it was driven by California which looked like a hockey stick.  Personal experience is that they have a ways to go in Massachusetts outside of 95 / 128 and Florida.  Much of the country that elected the Trump administration remains in the abyss.

Will increased rates end the housing party?  Maybe yes maybe no.   The WSJ quotes a study by John Burns Real Estate Consulting that looked at 10 instances over the last four decades of increased interest rate and the impact on the market.  Surprise strong job and wage growth along with a confident consumer did not result in an issue.

My guess is it will depend on your market and the surrounding industries.  While unemployment data remains positive it does not count the millions out of work who voted for the Trump administration.  The economy has acted differently than most economists predicted per a high level Boston Fed officer.  It is just different, so we shall see what happens to housing if 30 year mortgage rates get to 6%.

Rates have already moved from 3.6% to almost 4% since August of this year.  An increase from 4 to 6 percent will change a mortgage payment by 25%.   This is $610 a month on a $500,000 mortgage.  It will take substantial wage growth to support this type of increase.

Taxes

From pontificating to reality will take some time.  That said a few areas that may see a near term impact:

Repatriation tax reduced to 10%.  A 10% tax on some  $2.1 trillion sitting offshore in untaxed profits  may just provide the incentive necessary to bring a substantial portion of those funds home.

How will the companies invest this cash is the real question.  Buying back stock at today’s prices may not be an option.  If interest becomes nondeductible would they payoff debt?

Corporate tax rate:   This change might take a little longer as the details need to be feathered out.  It is not just a tax decrease but a change in what is deductible.  If interest becomes nondeductible how will that change capital structures and pricing?  If capital expenditures are not amortized via depreciation but become a deduction will companies accelerate automation and new plants. What will the impact be on productivity data and growth?

My sense is that there is a strong support for a corporate tax reduction to make America more competitive so I see this as a near term expectation.

Military Spending

Does anyone question the administration’s determination to eliminate ISIS.  This is a worldwide issue that needs strong leadership.  Having friends who own manufacturing facilities that service the US military I can assure you that business stinks for those that service the soldier but great for manufacturers of missiles and bombs.  The current administration has created large holes in the supple chain for raw materials used by soldiers as many have gone out of business.

I see positive change in this area.

One area that will be interesting to watch is pay for security.  Japan currently pays the USA $5 Billion for our military support.  What is the actual cost of that support?  With a fighter jet costing upwards of a $160 million and a new destroyer coming in at $4.4 billion it makes me believe our colleagues abroad might be writing some large checks.  This in turn might help balance the budget.

Infrastructure

Most infrastructure projects takes years to get approved, funded and off the ground.  It took 25 years to complete the “big dig”.  This most likely is a long term issue.  Then again if one borrows at 2% from Europe it could move faster especially for an administration skilled in this area.

The “Wall” – your guess is as good as mine but to save face some portion of the wall may come sooner than later.

Trade

The administration has selected a 78 year old turnaround billionaire to lead Commerce.  He will oversee trade from A to Z.  At 78 years old it most likely means this is an immediate impact area.  The Trump administration believes a number of the trade deals leave the USA shortchanged.  Trade deals and Obama’s et al Globalization have had a negative impact not only on the USA but in most if not all 1st tier economies.  Factories are on wheels and move to low cost producers whether they are efficient or not.  To bring back jobs a level playing field is a must to start.

To be successful those factories must employ the latest technologies which will employ substantially fewer workers.  That said robotics and similar industries will see increased demand as those industries grow.  Manufacturing unlike a service economy has a multiplier effect.   Stay tuned.

Note / Similar:  The crash of 2008 left the US auto industry in shambles much of it due to their own doing.  That said after retooling their plants are efficient, the product is competitive, and they are making money.  Ford decided not to move a plant to Mexico after the election.  The US can compete when unions and management work together.

Summary

While this is complex and influx it is safe to believe higher interest rates are on the way, the world is going to reset trade and those factories on wheels are going to move.  Our military is going to spend and become elite again.  US corporate tax rates will become more internationally competitive and some $2.1 billion in cash is going to return to the USA.  How the money is spent is critical and my sense is you will see incentives to spend on US made capital goods and infrastructure.

By | 2017-03-06T12:04:49+00:00 December 2nd, 2016|business advisory|0 Comments

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