Prospects: U.S. Fiscal Policy Update:Has Trump Made America OK Again?

Posted September 11, 2018 by rvillareal

• Fiscal stimulus from spending is building and could add 0.75 percentage point to second half 2018 growth, more than we think the consensus is talking about.
• The stimulus does not last long, because the added spending is assumed to be front-loaded. It could reduce 2019 growth by 0.4 percentage point. 
• Fiscal spending stimulus drops quite sharply in early 2020, cutting GDP growth by 0.75 percentage point in Q1. This could cause a serious pothole, if the Fed is playing catch-up ball and accelerating tightening in late 2019.  This stop-go pattern could happen, if the Fed pauses in late 2018 or early 2019, perhaps because the EM markets are in disarray and/or core inflation remains stable. 
• In any event, the nonpartisan CBO forecasts GDP growth around 3% in 2018 and 2019. While that is only OK by historical standards, it looks great compared to the lousy 2% GDP forecast CBO had made in 2017 just after Trump took office.  Unfortunately for Trump, you can’t run on a reelection slogan that says I made America OK again!
• The additional growth will prove quite costly, as the tax and spending packages passed in the past year will add almost $2 trillion to Federal debt. This will eventually push up interest rates and offset much, if not all, of the positive effects of the tax bill.  We may end up with 2% growth after the sugar fix of 2018-2019.