Policy Changes and the Macro Outlook
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Hello, and welcome to notes in the week ahead, a japan Morgan asset management podcast that provides insights on the mark acy the economy to help you stay informed in the week ahead.

Hello, this is David Kelly. I'm chief stretches here, a jp organised management in today's november eighteen, twenty, twenty four. I've been running my own econometric model U.

S. Economy from most thirty years now. The basic structure is simple, is started by forecasting the components of demand, that to say consumption, investment, trade in government spending.

This gives you an initial projection of real G D P. growth. You then feed this into labor market equations, along with some demographic assumptions, the forecasts, growth in jobs and employing ration way growth.

All of this along assumptions about energy Prices in the dollar, then drive forecasts of inflation. Give this address for growth and inflation. You make an assumption about the path of the federal funds rate, then run forecasts for other illustrates.

And with all this in hand, you can forecast productivity, corporate profits of federal budget deficits and household network. Then you go back to the start to see how all these changes impact original demand forecast. You repeat the process under.

They arrive at a reasonably consistent solution. There are, of course, many details each of these steps. And over the years, i've tended to add complexity, the model, rather than reduce.

This is the time of the year when I most regret that tendency. Since each fall, after government releases its annual benchmark GDP revisions, I overheard the model I had another year to the forecast. This is a very comer, some process. And this year I deleted for a month, two, on the grounds that the election might significant the impact the forecasts.

But IT has still, over the last week, i've had to bite the bullish and extend the forecast out of twenty to twenty six, including some important assumptions about the effects of potential polity changes in washington, particularly the areas of tabs, immigration and taxes, in order to assess the potential impact of policy changes, IT makes sense to first consider what the forecasts wood have like look like in their absence a year ago. We summarize, allow for twenty twenty four as two zero, two four than a day, two percent real GDP growth, zero recessions, inflation falling to two percent, an unemployed staying at or below four percent. This forecast has actually worked out pretty well.

We now expect four quality to show year over year real GDP growth of two hundred and two percent, you of your consumption of faction inflation of two point three percent, non employment rate of four point one percent. And we have, of course, avoid a recession. In the absence of policy change.

The model adjusts something very similar for both twenty twenty five and twenty twenty six, with real GDP growth and inflation averaging close to two percent. The only point is staying at four percent and the economy continues to dodged recession. However, this forecasts is read the result of a fine baLance among offsetting factories.

Consumer spendings is being boosted by political way, truth, improving consumer confidence and are continuing surgeon wealth that I said. So our job growth, rising consumer credit delinquencies and lower immigration, even for the changed administration, was set to slow consumer spending growth to two percent from the three percent achievement over the past year. Investment spending growth was also attract to moderate in a lag reaction to higher n interest.

Strates trade was set to attract from growth due to a high and weak as overseas and city of government spending was likely to grow more slowly following a delayed post pandemic Carrying spirit. This is a moderating economic growth would imply moderate employment growth of roughly one hundred, two hundred and fifty thousand jobs per month, keep in the drift down in immigration and staking growth in the native borne working population. This shouted been enough to hold the the unemployment rate .

close to four percent. Meanwhile.

in the absence policy change, inflation and should be in largely stable with consumption inflation inflation seeking close to two percent year over a year after seeing a small bompas e over the next few months. This view of the world is very close to that laid up with federal reserve at its september meeting and would be consistent with a slow Normalization of interest.

Strates Carry the federal funds rage from a peak of five a quarter to five and a half percent to range of two seventy five to three percent by the summer twenty twenty six. So how my policy changes impact this this outlook? Well, on tariff, the present electors vowed to impose a ten percent tariff on all imported goods and sixty percent time of chinese goods.

However, roughly thirty eight percent of goods are important from countries with whom the united states has a free trade agreement. Most news to be canada in mexico, we borrow this kind of unnatural time increase. If we exclude these countries, the average terre age and imported goods would rise from within three percent a day to eleven point percent, or increase of eight four day percentage points.

However, we assumed that because of negotiations with some trade partners, business pressures to examine some commodities, and foreign suppliers and importers eating some of the cost, the average Price of imported goods will only rise by half as much or four point four percent starting the second quarter twenty twenty five, with U. S. Goods imports equal to seventy percent of consumer spending.

This could, as a very rough estimate, add seven tencor percent to C, P, R. Inflation next year. Terrors would also reduce both important exports, assuming that foreign nations retaliated with equivalent terrorist both sides, U.

S. Trade could declined by equivalent percentages because the U. S. Imports more than exports. This couldn't Carry add economic growth. However, the impact of a trade war and slowing the global economy and the uncertainty direction caused by further need to supply change would likely more than negate this effect on the immigration. While campaign rhegium was extreme, expect actions to be so.

The new name borders are, tom homan has emphasize, will prioritize supporting on document immigrants with criminal convictions and final deportation orders. This group likely has much lower apple for participation in other migrant groups. Consequently, we do not expect a sharp decline in labour force from deportations.

That being said, the election may disclose you from across the border as well as damping more traditional immigration. Additional legal avenge to immigrate may be sold or strict ed, as was the case in the first trumpet administration, it's quite possible that the picture could change with the passage of immigration reform bill. However, for now, we assumed that a crackdown immigration cuts labor force growth by twenty five thousand people per month or three hundred thousand thousand per year, or roughly a quarter of that immigration in the year ended in june for twenty three.

On taxes in twenty twenty five, we expect the amorous reconciliation bill, which is the one budgeter vehicle community from senate philly busters, to contain some very significant tax cuts. This bill will likely contain a full extension of the twenty seventeen T C, J. A cuts that were set to expire at the end train five, the president selectors also promised a cut of the capital gains tax from twenty one percent of fifteen percent for domestic production, a restoration of full expansion of R N D and equipment purchases, also for domestic production, removal of the capon sol, deductions in deductables of all alone interest and exemptions from income tax for all social security tips and overtime income.

Based on calculations from the committee for a responsible federal budget, we estimate that a full implement mentation these plans without more than five trillion dollars. The federal da over ten years on top of a simple extension of the tax policy has been currently implemented. This could have mount over four hundred billion dollars in additional annual fiscal stimulus and deficit financing kicking in at the start of twenty six.

However, congress were very like to attempt to produce to cause these proposals so IT could, for example, raise, rather than eliminate the cap on salt reductions and means test the tax breaks and social security tips over time. So for now, we're assuming an annual two hundred billion dollar boost in fiscal suma deficits from changes in the tax code starting in twenty twenty six. Someone to argue that we should also boost the assumes of productivity from deregulation under new trouble administration. However, any such games are very hard to estimate and could be offset by the distortions caused by requesting supply chain reaction to terms, find ways to define production as domestic, trying to replace the porter immigrants, and maximizing the income that could be categorize as tips and overtime for taxes. So in incorporating policy change in the forecast, we only at this stage included assumptions on the inflation hit from tabs, the labour forces from tougher immigration policy and the income deficit impacts of tax cuts.

The net result .

of this is to somewhat destabilized, a very stable forecast. Economic growth will be large, unaffected next year, with real GDP rising by two point two percent. Review about the four court twenty twenty five however, powerful fiscal stimulus from tax cuts kicky in the start twenty twenty six could boost year over year real GDP growth to two point eight percent by the end of that year.

Job grows would also .

be really affected in twenty five. We will pick up in twenty twenty six in response to physical stimulus. Lower labor force growth due to less immigration would cut the unemployed three point nine percent by the end, twenty twenty five, and three point six percent by ten, twenty twenty six. Inflation as measure the person consumption to flavor could rise to two point seven percent year of you, you over the fourth core, twenty twenty five in a one time feet to effect from terabits, and then drift down to two point one percent year of year by the end twenty twenty six mean what the federal reserve could as the market now anticipates for premature end to the easing cycle. With just three more twenty five basic point rate cuts taking the federal funds rate down to range of three, seven, five to four percent by next summer and then holding IT there needed to say our fiscal situation would worsen, with the federal budget depth of potential rising from one point eight trillion dollars in fiscal twenty twenty four to two point seven trillion dollars, or eight point four percent of GDP by physical twenty twenty six.

Now IT should be .

stressed at all this, a tighty speakers of we do not know the details on any of these policies or how aggressively the new administration will be sue them. That being said, on a very rough forecast, none of the spells disaster for the economic markets in the short run, and equity could directly benefit from further reduction in the corporate incomplete rate.

However, IT deal suggests that barring recession, long term treasury als and more draws are more likely to drift up from here than to drift down. Moreover, further weakening and already stressed public finances adds long term risk to any investment scenario. O for this reason and because both U.

S. Equities on the dollar have reason substantially over the course of the selection year, now be a good time for investors to consider broad diversification with among U. S.

Assets and around the world. Well, that's IT for this week. Please turn on again next week and have any questions. In the meantime, please reach out to be more and representative.