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Moody’s Zandi: Why Trump’s ‘Shocking’ Election Changed My Forecast

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Slower growth coupled with higher inflation, interest rates and government debt load. That’s what the U.S. economy will look like under President Donald Trump, according to Mark Zandi, chief economist of Moody’s Analytics.

The firm’s “outlook for the U.S. and global economies has been shaken up by the shocking election of Donald Trump as president of the United States,” writes Zandi in the firm’s latest monthly economic outlook. “Based on our analysis to date, the economy under President Trump will likely perform a bit better in the near term but ultimately it will be diminished.”

Zandi is projecting that GDP growth under four years of President Trump will be less than 2% per year, below the 2.2% he had been forecasting before the election. “That is not a big difference in any given year, but it is meaningful over a four-year period,” writes Zandi.

Key reasons for his weaker outlook: A smaller workforce due to Trump’s immigration policies, which will cause some undocumented workers to leave the U.S. and fewer entering; a slowdown in global trade – Trump has threatened to impose tariffs on imports from China and Mexico – and a stronger dollar.

Zandi’s colleague, economist Michael Ferlez, writes that deportations could reduce the U.S. labor force by 2.16 million, or 1.4%.

Zandi expects the dollar will continue to strengthen against the euro and Japanese yen, boosted by Fed rate hikes, and remain “the global economy’s principal reserve currency for the foreseeable future.”

Like most analysts post-election, Zandi and his colleagues admit there is a great deal of uncertainty about what policies President Trump will pursue and what he’ll be able to accomplish even with a Republican Congress.

“How well financial markets and the economy hold up in the coming year will depend on how quickly the new administration will be able to articulate and implement its economic policies,” writes Zandi. “It is unclear who will take the key policy positions … let alone where the teams of economists, financial analysts and lawyers needed to formulate legislation will come from.… It could take an uncomfortably long time for impatient financial markets.”

In addition, a Republican Congress may not fully embrace Trump’s proposals to cut taxes and increase spending, which are not deficit neutral and are expected to swell the federal deficit, writes Zandi. These include Trump’s $1 trillion infrastructure spending program and 15% top marginal tax rate for corporations. “A top marginal rate of no less than 25% seems more doable,” says Zandi. 

“Ultimately the economic impact will depend on what policies the new administration will actually pursue,” writes Ferlez.

In the meantime, “businesses will likely delay investment and hiring decisions, and consumers will pause at least for a while to stake stock,” writes Ferlez. And those responses, coupled with rising rates orchestrated by the Fed — Moody’s Economics forecasts a rate hike in December and three next year — would likely slow growth.

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