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Wall Street economists aren't buying into Trump's big growth outlook
Many of Wall Street's top economists aren't seeing the booming growth that President-elect Donald Trump expects from his administration's policies.
A CNBC survey of 13 top Wall Street economists finds the average forecast for next year rising from an estimated 1.7 percent this year to just 2.3 percent next year, and to 2.5 percent in 2018. That's below what candidate Trump said his economic plans could generate when he unveiled them in September.
"We are looking at 3 percent, but we think it could be 5 or even 6," the president-elect said.
The reasons economists don't agree with the strong growth forecasts range from simply not having enough detail to model the effects, to the belief that Trump will get only a portion of what he's proposing from Republicans in Congress.
But some economists doubt Trump's outlook in part because for all the potential upsides, there's potential downside. For example, the president-elect's proposals on cutting taxes and deregulation are seen as strong positives, but the growth effects can be countered by the likelihood of higher interest rates, a stronger dollar, inflation and deficits. And nearly all the economists surveyed see Trump's trade policies as a negative for the economy.
"I think there's a good case for saying we're going to get some fiscal stimulus. We've been cautious. We think Congress is not that willing to go ahead with a deficit-funded fiscal program of cutting taxes and increasing fiscal spending," said Bruce Kasman, chief economist at JPMorgan. The bank looks for just 1.9 percent average growth over the next two years.
Members of Trump's administration aren't backing off their strong forecasts, however — and so far, the stock market seems to be siding with them.
"Every time people bet against Donald Trump, they are quickly and sorely disappointed, and I think economically that's true as well," said counselor to the president-elect Kellyanne Conway. "You look at everything Donald Trump has said as a candidate, as president-elect, and you quickly see this is a man who will not settle for anemic 1.5-2 percent growth. He presumes 3.5-4 percent growth."
All of this creates a disconnect between the optimism that looks to be built into stock markets right now, and the more measured outlook among economists for higher — but not soaring — growth.
William Lee, head of North America economics at Citigroup, said he expects Trump's policies to be a negative for 2017 growth, prompting him to lower his forecast for next year. Lee now looks for 2017 growth of just 1.8 percent, down from 2.1 percent, in part due to drags from a stronger dollar and rising interest rates and because there would be no offsetting boost from stimulus until later on.
"It's going to easily be 2018 before things hit the economy. I'm not convinced there's that much stimulus involved," said Lee. His 2018 growth forecast is 2.5 percent.
Economists say one issue for the Trump plan is that it will run headlong into congressional deficit hawks who will want to make sure stimulus spending does not expand the budget deficit significantly. The plan to cut taxes will face the same test, as tax writers barter over ways to prevent the cuts from eliminating needed revenue.
"We need some revenue to cover those tax breaks. It's a fight among Republicans more than anything else," said Lee.
According to Bank of America Merrill Lynch economists, the country is likely to grow at a 1.7 percent pace this year, and see just 2 percent growth next year.
"For the first half of next year, I think we're going to be in the same trajectory — high 1 percent, low 2 percent growth," said Michelle Meyer, Bank of America Merrill Lynch's head of U.S. economics. She noted, however, that it's possible tax reform could be passed ahead of the summer recess, which could spur some anticipatory spending.
Meyer said the real payoff from stimulus and tax cuts will be year after next. "For 2018, I'm forecasting 2.5 percent growth on the combination of tax cuts, tax reform and perhaps some changes in regulation."
The wild card for Meyer and other economists is what Trump might do with trade policy. For now, the expectation is still that he won't start a harmful trade war, but if he does begin to take aggressive action, that could be a negative for growth.
"Right now it's too hard to forecast, so we haven't put an assumption into our forecast. We're assuming there's little change, but it's possible you see trade agreements being renegotiated and perhaps frictions on the part of trade partners and some higher costs," said Meyer.
Kasman said his assumption is that trade policies will not become the negative some fear, and that Trump's policies will ultimately kick the economy up a notch. "I think by the time we're in the middle of the year going into end of 2017, it's going to switch from a negative to a positive, if we're right that he's going to bark more than bite on trade," Kasman said.
There is a proposal in the House of Representatives to institute a "border-adjusted" corporate tax that would tax all imported goods and services, but not tax exports at all. It is seen as a major negative for some industries, particularly retail, which imports 95 percent of the apparel and shoes sold in the United States .
Meyer does not expect the border-adjusted tax to be part of the final corporate tax plan, which currently proposes a 20 percent corporate tax rate, down from 35 percent.
There are other parts of the House tax proposal that could be negative, including the plan to end interest rate deductions for corporations.
"That would change the way financing is done. All this debt financing goes out the window, and it will raise the effective corporate tax rate," Lee said. U.S. companies have issued a record amount of new investment-grade corporate debt, totaling more than $1.3 trillion.
"It would kill our [mergers and acquisition] industry in a heartbeat. It would be quite costly … that effectively raises the tax rate on all companies."
But Lee said the destination tax is still a "battle of the wonks," and it's not clear how far it will go.
"If it does happen, it will take five years to happen. The whole trick is you change the balance of trade. You lower imports and you raise exports. That means the dollar should appreciate. The U.S. is running the reverse. The dollar responds to a lot of things. It responds most to interest rate differentials. Monetary policy has the biggest impact on the dollar, and these trade effects slip in after that," he said.
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