Has the Bloom Dropped Off the Trump Rose?
In the wake of Donald Trump’s election, the stock market soared. Consumer’s expressed optimism about the future. There was even talk of robust economic growth. But as we’ve moved into the second quarter of 2017, there seems to be cracks forming in this rosy narrative. Despite the optimism, the Federal Reserve Bank of Atlanta’s growth forecast fell off a cliff in March. The latest GDP forecast for Q1 on March 31st came in at a paltry 0.9%.
“The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2017 is 0.9% on March 31, down from 1.0% on March 24. After this morning’s personal income and outlays release from the US Bureau of Economic Analysis, the forecast for first-quarter real consumer spending growth fell from 1.4% to 0.8%.
The US Treasury yield curve also raises concern. The Wall Street Journal called it “a worrying sign for investors banking on resurgent US inflation and growth.”
“Long-term Treasury yields, which are largely driven by the US economic and inflation outlook, have declined modestly this year, following a sharp rise in the wake of the November election of Donald Trump as president. The 10-year US Treasury yield has fallen to 2.396% from 2.446% at the end of 2016. At the same time, short-term yields, which are more influenced by monetary policy, have risen in 2017 as Federal Reserve officials have made clear that they expect to continue raising the fed-funds rate through the rest of the year. As a result, the yield premium on the 10-year note relative to the two-year note—known in the market as the 2-10 spread—slipped Wednesday to 1.107 percentage points, its lowest level since the election.”
As the WSJ points out, a flattening yield curve can be an early sign of both economic slowing and overpricing in riskier asset classes. The article also points out a widening spread between junk bonds and treasuries that could indicate concerns about a slowdown-induced credit crunch.
All of this signals economic growth may not be nearly as robust as everybody seemed to predict at the beginning of the year.
So what’s going on? Is it possible the bloom has dropped off the Trump rose?
In the wake of his election, there were widespread expectations that the new administration would cut taxes and regulations, and embark on an infrastructure construction program that would serve as government stimulus. The markets seemed to get a boost from Trump’s election with its promise of something new. But there wasn’t a whole lot of substance to back up the giddiness.
Now, nearly three months into the Trump era, the shine is already starting to wear off. The recent healthcare debacle certainly tarnished Trump’s reputation as a deal-maker, and raised doubts about his ability to get things done in the political arena. Analysts may be realizing that, practically speaking, the new Coke isn’t a whole lot different than the old Coke. Last week, Trump’s approval rating fell to historic lows considering his term length.
It’s interesting to look back at the Federal Open Market Committee notes in December. The Fed expressed a lot of uncertainty about Trumponomics at the time.
“In their discussion of their economic forecasts, participants emphasized their considerable uncertainty about the timing, size, and composition of any future fiscal and other economic policy initiatives as well as about how those policies might affect aggregate demand and supply. Several participants pointed out that, depending on the mix of tax, spending, regulatory, and other possible policy changes, economic growth might turn out to be faster or slower than they currently anticipated.”
Have the last three months really changed this equation at all?
“No one has the slightest idea what’s happening as insane levels of debt distort the models economists use to predict the future. From here on out, it’s unpleasant surprises all the way down.”
Nobody likes unpleasant surprises, but they are inevitable in a world dominated by central planners and politicians intent on intervening in the economy. You can’t avoid the surprises completely, but there is a way to protect yourself from their impacts – the safe haven of gold and silver.
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