Listen, I don’t know if you know this or not, but not everyone is convinced that Donald Trump knows what the fuck he’s doing when it comes to managing the economy.
To be clear, I have absolutely no idea why anyone would doubt him on that. I mean after all, he said he was going to run the country like one of his businesses or maybe like his personal finances and we all know how successful he’s been in that regard.
I’m just kidding about the “successful” bit. Donald Trump is a failed businessman, failed mail order steak salesman, for-profit college con artist, failed professional football team owner, and by some accounts, would be richer today had he just put his money in an index fund decades ago and left it alone (to be fair, that probably goes for most of the investment community).
On Friday, the Washington Post regaled America with the tale of how a younger Trump was so desperate to land himself on the Forbes list, he cooked up an elaborate scheme to lie to a reporter. And “lordy, there are tapes.”
Yeah. Absurd, I know. But what do you expect, right? And somehow that’s the guy who’s going to usher in an economic renaissance.
Well unsurprisingly given his abysmal track record, expectations are starting to falter for the Trump economy. For instance, this week Barclays revised their Q1 GDP estimate to 1.5% q/q saar from 2.5% previously and while they do an admirable job of dressing it up with references to the ubiquitous “residual seasonality”, the language is notably downbeat. Here’s an excerpt:
That said, residual seasonality is not the only factor suppressing rates of growth early in the year. Incoming data on household spending point to weaker durables consumption as auto sales are returning to more sustainable rates following the post-hurricane surge in sales last autumn. We forecast that private consumption will rise only 1.0% q/q saar in Q1, versus the 4.0% seen in Q4. The true momentum in private consumption is likely between the Q4 and Q1 outturns; private consumption rose 2.8% in 2017 and the effects of the tax plan, in our view, are likely only starting to be felt now by households. In addition to underperformance in private consumption, housing activity data has been mixed, which we believe owes partly to the lagged effects of the modest rise in mortgage interest rates, uncertainty about the effects of the tax package on housing demand, and payback from the solid 12.8% q/q saar pace of growth in residential investment in Q4. Elsewhere, nonresidential investment has been modestly stronger than we anticipated, while the drag from trade is likely to be larger than we had forecast previously. Last, inventory accumulation should add significantly to growth in the quarter and offset much of the drag from trade.
Again, it’s not all bad news, but it’s hardly “tremendous”.
Meanwhile, you’ll recall that according to a new survey series conducted by BofAML, consumers aren’t generally expected to spend their “windfall” from the tax cuts at anywhere near the rate some folks were anticipating. In fact, roughly half of respondents said they’ll be using any extra money they get to pay down debt and/or save, which doesn’t bode particularly well for an economy that depends on consumer spending.
“In our baseline economic forecasts, we have assumed that the US consumer will spend 1/3rd of the cash windfall from the tax cuts [while] the rest would be saved or used to pay down debt,” BofAML writes in a follow up note, explaining that “this multiplier was based on prior experiences – looking back at the 2001 tax cuts and the 2008 tax rebate, the literature found that consumers spent between a quarter to a third of the tax savings.”
That’s shaping up to be wishful thinking. Here’s some further color:
The evidence thus far suggests that the propensity to spend out of the tax cuts may be lower than our prior. For starters, the March retail sales report was fairly lackluster with core control sales only up 0.4%, leaving the three month trend at 0.1% mom, the lowest since September 2016 (Chart 2). In our view, it should have been “easy” to realize exceptionally strong retail sales in March: 1) the prior three months were weak, setting up for a strong bounce back given the nature of the monthly data; 2) tax cuts have kicked in which means take-home pay increased; 3) tax refunds were delivered with the lower-income cohort seeing the flow of income in late February therefore supporting March sales. Yes, the winter weather likely created some challenges but based off the analysis of our aggregated card data, the effects were only modest.
Oops. As you can see from the chart in the left pane, only a net 5% of respondents to the bank’s most recent Global Fund Managers Survey expect global growth to be stronger over the next 12 months. Obviously, not all of that is attributable to reduced expectations for the U.S., but you get the idea.
And here’s the thing: there’s a psychological element to this. As David Stockman has shown repeatedly, there is little real evidence to support the conclusion that Trumponomics has done anything to help the Main Street economy. This is, for the most part, smoke and mirrors perpetuated by the President’s Twitter balderdash and blatant lies delivered at campaign-style rallies.
What happens in the event the opposite narrative takes hold? That is, what happens if everyone wakes up to the fact that all the deficit spending the GOP promises will pay for itself via higher growth actually doesn’t pay for itself as every economist you care to ask has suggested it won’t? Here are BofAML’s thoughts on that:
Optimism has faded from excessively high levels at the start of the year. This doesn’t mean that we won’t see solid economic performance this year but the “right tail” risk of a booming economy is being priced out. Rather the “left tail” story – that fiscal story will result in large deficits with little to show for it – has become more socialized. If this becomes the more mainstream narrative, be ready for a more cautious investor. This puts the emphasis on the next few months of growth data, particularly the behavior of US consumers.