It has been nearly a year since Donald Trump was installed as US President. During that time we have seen the stock markets rise but little in the way of actual policy success from the new administration. Mr Trump has as yet not changed any economic policy but there is a feeling amongst business leaders that growth prospects have improved particularly over regulation. Clearly Trump wants a less regulated and less taxed America and business approves.
The US markets have done well in recent months, pushed up by higher earnings growth from the technology giants like Microsoft and Amazon. These gains moved US stock markets to new highs with the S&P 500 hitting 2692 on 1st December, up 17.4% this year.
The rise in technology stocks was aided by the announcement from the Trump administration of proposed cuts in corporation taxes. This additional incentive drove markets higher at a time when no such incentive was needed in America. US markets were already in good shape due to global demand and growth. The rise in oil prices bolstered the large US energy sector.
Around 50% of all earnings made by S&P 500 companies are from outside the US giving evidence that the world economy is strong. The relatively weak US$ has made US exports a little cheaper in foreign markets which has resulted in earnings growth. Over the last two quarters, US GDP has increased by an annual rate of 3% while US consumption increased by 2.4% and business investment grew 8.6% year on year.
The Trump administrations new tax reform proposals include reducing the existing seven tax bands to three 12%, 25% and 35% and reducing corporation tax from 35% to 20%. The corporation tax cut would be a major boost to company retained profits. Some analysts think that Wall St is over optimistic about stock prices based upon the proposed tax cuts given the impact any reduction will have on the US national debt and the array of political interests that need to be convinced the country can afford the risk of raising the Federal budget deficit to fund it. Mr Trump’s first policy success could be his tax reforms that have now passed through both the House of Representatives and the Senate.
While the growth numbers for the US were very encouraging in Q3 some analysts were expecting a downturn in growth due to the devastation caused in the southern states by Hurricanes Harvey and Irma. In fact, the hurricanes did effect job growth with only 18,000 new jobs created in September reflecting the job losses in Florida and Texas. In October, US employers added a further 261,000 new jobs which is the biggest month for jobs since July 2016.
US wage growth has been slower than would be expected for an unemployment rate of 4.1%, the lowest since 2000. This may be a signal that unemployment can fall further before the labour market is tight enough to cause wage inflation.
The optimistic outlook for US growth and consumption strengthens the case for the Federal Reserve rising interest rates gradually. Fed Chair Janet Yellen feels the US is ready for less monetary stimulus as the economy has performed well and there is confidence in the outlook. In October, the Fed started to unwind its portfolio of bond assets at a rate of US$ 10bn per month. One impact of reversing quantitative easing is that long- term borrowing costs will rise.