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Trump tax cut boost fade, trade war hit 2019 GDP: Goldman Sachs, BAML:

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President Donald Trump
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Images


  • President Donald Trump has boasted about the upswing in the
    US economy for much of 2018.
  • But according to economists at Goldman Sachs, JPMorgan, and
    Bank of America Merrill Lynch, the economy is showing signs it
    could cool in 2019.
  • The combination of a fading tax cut stimulus, tariffs, and
    tighter financial conditions will all contribute to a slower pace
    of economic growth.

President Donald Trump has had a lot to
brag about on the economic front
in 2018.


Strong unemployment numbers.
 The highest
quarterly GDP print
in nearly four years.

But according to a growing consensus of Wall Street economists,
the economy is showing fresh signs it could cool off in 2019, as
the shot in the arm from Trump’s policies wears off during the
course of the year. Economists at Goldman Sachs, Bank of America
Merrill Lynch (BAML), and JPMorgan all predicted that 2019 GDP
growth will be materially lower than 2018.

“Growth is likely to slow significantly next year, from a recent
pace of 3.5%+ to roughly our 1.75% estimate of potential by
end-2019,” Jan Hatzius and David Mericle, Goldman Sachs
economists, said in a note to clients.

The reason for the slowdown is twofold:

  • The economists expect the stimulus from the GOP tax cut bill
    and the massive bipartisan budget agreement to start to fade next
    year.
  • “In the US, the double dose of caffeine from tax cuts and
    spending increases is already starting to wear off,” Ethan Harris
    and Aditya Bhave of the BAML team wrote.
  • At the same time, the US is expected to get hit with growing
    headwinds from Trump’s continued trade war with China and the
    Federal Reserve’s interest rate hikes.

These two factors could make the economic sugar high fade even
faster than expected.

“Monetary, fiscal and trade policies all are turning somewhat
less friendly for growth next year,” Michael Feroli, Jesse Edgerton, and
Dan Silver, JPMorgan’s economist trio, said in their
outlook.

Fading fiscal stimulus

In the run up to the passage of the GOP’s Tax Cuts and Jobs Act,
or TCJA, most Wall Street economists agreed that the tax cuts in
the bill would
prompt a short-term bump
for the US economy. While the size
and duration of the bump were hotly debated, all three Wall
Street economists expect the boost will start to fade in the
second half of 2019.

There are already signs that the boost from the tax cuts are
fading that could become more obvious next year, JPMorgan’s
economists said. They cited the
slowdown in capital investment from corporations
, for
instance.

“The tax cuts already have been lifting growth throughout much of
2018 and we think that federal spending associated with the
spending bill will firm noticeably around the turn of the
calendar year,” the JPMorgan economists said. “But the impact
from the tax cuts likely is already starting to fade and the lift
from federal spending will also ease over time, so we expect
fiscal thrust to moderate toward the end of 2019.”


mcconnell pence trump ryan
Republican leaders Mitch
McConnell, Mike Pence, Donald Trump, and Paul Ryan after the
passage of the Tax Cuts and Jobs Act.

Chip Somodevilla/Getty Images

A big part of that will come from a relative slowdown in consumer
spending, which was supported in 2018 by the tax cut’s boost to
most Americans’ take-home pay.

“After-tax income jumped higher in February 2018 but will return
back to its normal growth in February 2019,” wrote Michelle
Meyer, another of the BAML economists. 

Similarly, the JPMorgan team said it expects that consumer
spending will grow by 2.2% in 2019, down from the roughly 2.7%
pace in 2017 and 2018, mostly due to “waning fiscal stimulus and
tightening financial conditions.”

Elsewhere, the Federal Reserve is also
expected to continue interest rate increases
in 2019
(much
to Trump’s chagrin
). The economists said that would make it
harder for businesses to borrow and tighten financial conditions.
All told, the hikes will likely help to keep a lid on any upside
for GDP growth.

Trade war troubles

Trump could further shoot himself in the foot by continuing to
fight a drawn-out trade war with China.

  • A 10% tariff on $200 billion worth of Chinese goods is
    scheduled to increase to 25% on January 1.
  • Trump also threatened a tariff on the remaining $257 billion
    worth of Chinese goods that are not currently subject to duties.
    Those tariffs would fall more heavily on consumer goods, possibly
    weighing on American households.

The JPMorgan team said price increases for consumers would be
more than enough to offset the 2018 boost from the tax cuts.

“The household sector was the beneficiary of a roughly $120
billion reduction in taxes beginning in early 2018,” Feroli,
Silver, and Edgerton wrote. “Next year, if 25% tariffs go through
on Chinese imports, that would amount to a tax increase of over
$100 billion, much of which would fall on the consumer.”


Donald Trump Xi Jinping
Chinese
President Xi Jinping and President Donald
Trump.


Andy
Wong/AP Photo



Some analysts, like Seth Carpenter, the senior US economist at
UBS, have presented even more dire possibilities.

As Business
Insider’s Will Martin reported
, Carpenter thinks the trade
war could actually drag GDP growth below 2% as early as the
fourth quarter of 2018.

“We are outliers compared to the rest of Wall Street in
terms of how big an effect the tariffs have on the US economy,”
Carpenter said in London. “We expect a material slowing in the
fourth quarter of this year — so right now — into the first
quarter of next year.”

By contrast, the Goldman, BAML, and JPMorgan teams said the
tariffs are likely to shave a few tenths of a percentage point
off of 2019 GDP growth — and a
deal to eliminate the tariffs
could come during the
year. 

But this doesn’t mean there isn’t danger of an escalation.

“An even more dire argument for major escalation draws on concept
of a Thucydides Trap,” BAML’s economists wrote. “This is the view
that when one great power threatens to displace another, war is
almost always the result. In this case, tariffs could extend to
all trade on a sustained basis as the US tries to contain China’s
emergence as an economic rival.”

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