Nov. 13, 2016 11:30 a.m. ET
The presidency of Donald Trump is poised to usher in a new era for the U.S. economy that forecasters say could boost economic growth, bring higher interest rates and inflation, and a new set of potential risks including international trade wars.
The cautious optimism revealed in The Wall Street Journal’s latest monthly survey of economists owes to the belief that the Republican’s proposals to reduce taxes and invest in infrastructure will amount to a substantial fiscal stimulus.
The change of administration could “knock the U.S. economy out of its low-altitude, low-growth orbit,” said Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida. The question is, he said, “Will it put the economy in a higher growth orbit, or will it knock us down into the atmosphere and a fiery re-entry?”
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On average, economists marked up their growth forecasts. The economy could expand 2.2% in 2017 and 2.3% in 2018, as a fiscal stimulus kicks into gear, up from about 1.5% over the past 12 months. Inflation is seen at 2.2% next year and 2.4% in 2018. If correct, it would be the first stretch of sustained inflation above 2% since before the recession of 2007 to 2009.
The forecasts were collected from 57 academic, business and financial economists from Nov. 9 to Nov. 11. Their average forecasts for growth, inflation and interest rates in both 2017 and 2018 all rose, at least slightly, from a survey conducted before the election in October.
Mr. Trump’s administration is only beginning to take shape, and many economists cautioned their estimates are tentative. “Anyone who tells you they absolutely know what will happen under a Trump presidency is probably lying,” said Megan Greene, chief economist at Manulife Asset Management.
The priorities of the incoming administration and congressional Republicans are being hashed out. Ms. Greene notes the policies Mr. Trump could enact the most quickly, such as restricting trade or immigration, could do swift harm to the economy. The source of the current optimism is tax cuts and infrastructure plans, but these would take longer to implement because they would need to go through Congress.
Mr. Trump and GOP congressional leaders share goals of cutting taxes and reducing regulations. Most economists believe tax cuts, especially if not accompanied by spending reductions, would produce a short-term boost to economic growth. His proposals to increase infrastructure spending, if successful, could lead to a large boost in construction employment, with spillover effects for other industries.
The economic impacts of eliminating or significantly altering the Affordable Care Actdepend crucially on what the nation’s health-care system looks like afterward.
It is unclear how much congressional Republicans support Mr. Trump’s proposals to curtail immigration, restrict trade or significantly boost spending on infrastructure.
In recent years, an assumption of ongoing congressional gridlock underpinned most economic forecasts. Republican leaders in Congress fought most of Democratic PresidentBarack Obama’s initiatives, particularly those that would increase the deficit.
Budget battles frequently lasted until the 11th hour, stoking fears that U.S. Treasury bonds could go unpaid. In 2013, the battles shut down the government for more than two weeks. “Now that Republicans are in control, there’s no concern about debt and deficits,” said Steven Blitz, chief economist at Pangea Market Advisory. Earlier this year, Mr. Blitz feared the economy could easily tip into recession but said a combination of tax cuts and rising spending would reduce that risk.
Over the past year, forecasters consistently fretted that a severe slowdown in international growth was the biggest risk to the U.S. Not anymore. In the post-election survey, 65% of economists said the factors likeliest to knock the economy off course were potential White House missteps.
The potential for a trade war topped the list. It was cited as the biggest risk to the economy by 43% of economists. A move from the U.S. to impose tariffs on foreign nations could lead to a spiral of rising trade barriers, higher import prices, and shrinking markets for U.S. exporters.
“Everyone will lose if there is a global trade war,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.
Other economists remain worried about the potential for business investment to deteriorate further. Business investment in equipment and structures has declined over the past year, partially attributed to uncertainty about the policy outlook after the election.
“Uncertainty on major policy issues limits hiring and investment decisions,” said Robert Dietz, chief economist at the National Association of Home Builders.
Overall, respondents to the Journal’s survey see about a 1 in 5 chance of a recession in the next 12 months. Those odds have declined slightly over the past three months, but are up from 14% a year ago.
Write to Josh Zumbrun at Josh.Zumbrun@wsj.com
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