Political divides continue to loom over US growth prospects, as US President Donald Trump tries to move emphasis to his trade policies after his failure to pass a signature healthcare bill.
Consumer sentiment edged up in March, according to a survey by the University of Michigan, but came in lower than economists had been expecting. The consumer sentiment index rose to 96.9 from 96.3 the month before – lower than the 97.6 consensus prediction.
The failure of the Republican party’s American Health Care Act, planned as a replacement for Obamacare, highlighted both the highly partisan nature of the current US political environment and the difficulty for Trump to pass even more ambitious tax reform.
The healthcare bill faced uniform opposition from the Democratic opposition party, but also objections from both ends of the Republican party.
Richard Curtin, chief economist for Michigan surveys of consumers, said: “Democrats expect an imminent recession, higher unemployment, lower income gains, and more rapid inflation, while Republicans anticipate a new era of robust growth in incomes, job prospects, and lower inflation.”
“It is a rare situation that combines increasing optimism, which promotes spending, and rising uncertainty which makes consumers more cautious spenders.”
For businesses and investors the healthcare failure does not matter in itself, but does call into question the President’s ability to pass massively ambitious tax cuts alongside wholesale reforms to taxation.
Trump’s plans would fundamentally reorient the US tax system to penalise imports and fight to close the country’s yawning trade deficit.
On Thursday the President tried to move the focus onto an upcoming summit with China. Trump said the meeting will be “very difficult” because of the “massive trade deficits and job losses” he says the country has caused.
The meeting next week with China will be a very difficult one in that we can no longer have massive trade deficits...— Donald J. Trump (@realDonaldTrump) March 30, 2017
Trump’s economic nationalism is heavily influenced by his chief strategist Steve Bannon as well as trade adviser Peter Navarro.
Navarro, the author of a book called “Death by China”, says the US economy has been exploited by China, which has stolen jobs and economic growth, he says. In an article a year ago Navarro said the trade deficit is “bleeding American workers dry”.
The Republican tax plan calls for a “destination-based cash flow tax” (DBCFT), as well as reducing the corporation tax rate to 20 per cent (from the current rate of 35 per cent). It will remove all taxes on foreign earnings, but will heavily instead heavily penalise imports, with so-called border adjustments.
The motivation behind the plan is to encourage businesses to move jobs back to the United States from abroad. However, such a radical change to the US tax system will have massive implications for global markets.
Even proponents of the tax plans expect the US dollar to increase in value by 20 per cent overnight once the bill is definitely confirmed. While this is seen as a welcome balancing effect, the short-term consequences could be disastrous for global markets.
Emerging economies with dollar-denominated debt could be swamped by an overnight 20 per cent increase in their liabilities, while commodities (including oil) would immediately see dollar prices soar.
So far investors doubt how successful Trump will be in forcing through such massive changes in the face of the same coalition of moderate Republicans and the ardently libertarian conservative wing.
Emerging markets bond equity and bond funds saw inflows of nearly $4bn in the week up to Wednesday as the obstacles to the President actually making law became clear, according to fund flows data from EPFR.
Meanwhile bond funds saw inflows of more than $9bn and US bond funds have seen the biggest inflows in cash terms so far in the first quarter of 2017. After Trump’s election bond funds saw money pour out as investors expected “Trumpflation”, or Trump-inspired inflation, to favour investments in US equities.
Since then, however, sentiment has shifted back somewhat, leaving the big rally in US equities since the November election struggling for further momentum. The prospects for the Trump trade to restart will depend in large part on how the President manages to unite his party around his radical programme.