The Independent Market Observer

The Economy Under President Trump

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Jan 20, 2017 3:10:18 PM

and tagged Politics and the Economy

Leave a comment

inaugurationToday, America carried out the peaceful transition of power that is at the heart of our democracy—except that we don’t actually have a democracy but a republic. In a democracy, the people make the decisions. In a republic, they elect representatives who make the decisions for them. This is a subtle but important difference, and one that represents a very deliberate decision by the founders, who distrusted popular sentiment.

Beyond separating the people from direct control of the government, the founders intentionally built multiple conflicts and ambiguities right into the structure of government. Three branches, each able to hold the others accountable. Multiple layers of authority within each of the branches, for the same reason. Multiple levels of government—federal, state, municipal—all fighting for their own interests. Frankly, it’s a mess.

Faster growth ahead?

Because of this complex structure, though, anything that actually gets through is likely to have fairly wide support, representing a reasonable national consensus. Errors to one extreme can and have happened, but they are usually followed by a correction.

From an economic point of view, this is very clear when we consider the last Bush presidency, the Obama presidency, and now the beginning of the Trump presidency. A couple of themes stand out. Deregulation and tax cuts were followed by reregulation and tax increases, which will (presumably) be followed by more deregulation and tax cuts. In this sense, the Trump presidency is not only not that unusual but could actually be somewhat predictable if we use the Bush presidency as a template.

With the economy solid and increasingly likely to accelerate, the fiscal stimulus of a tax cut would add fuel to the fire, sparking faster growth. Less regulation, and an increased appetite for growth, would drive businesses to expand faster and take on more risks. Banks would lend into the upward cycle, making more money and taking more risks as well. This is all part of the normal economic cycle (and just what we saw in the mid-2000s)—as is the ultimate recession and restructuring, when we write off all the bets that didn’t work out.

We can reasonably expect faster growth—and better animal spirits—for the first part of the Trump administration. It may look a lot like, perhaps, 2003 through 2007.

The challenge: keeping the recovery going

The problem in comparing now with then is that the starting conditions are not the same. Compared with George W. Bush, Trump takes office with a large structural deficit, a much higher level of debt, and a deteriorating demographic and governmental financial profile, as the baby boomers retire and start collecting social security and Medicare. Although Bush was able to run the economy hot for a period of years, this administration’s ability to do so will likely be constrained by the weaker starting conditions.

The question will be whether 2017 looks more like 2005 or more like 2007.

Much depends on whether the new administration and the Republican Congress can work together effectively to spark higher real growth levels—the primary determinant of how long a Trump expansion can last. With inflation starting to rise, the Fed embarking on a rate increase cycle, and full employment, the easy recovery has been made. Keeping it going will be increasingly challenging. This is the problem any president would face at this stage of the cycle.

And that, in the end, will determine whether the Trump presidency succeeds or not. Presidents Reagan and Clinton are remembered not for their controversies and scandals but for how the country did as a whole. What we think about 2017, looking back from 2027, will depend largely on whether Trump and Congress are able to implement policies that allow for sustainable growth beyond the cyclical rebound we are currently enjoying.

  Subscribe to the Independent Market Observer

Subscribe via Email

Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®