Washington Trust Bank Blog | What Should You Be Monitoring In Advance Of The New Administration and Congress?

What Should You Be Monitoring In Advance Of The New Administration and Congress?

Although there is much commentary and many forecasts being issued regarding what a Republican sweep of Congress and the Presidency will mean for the economy, the reality is that we still have to inaugurate President-elect Trump and see actual legislation passed or executive orders issued before we can truly gauge how the economy will be impacted.

Even though we do not have definitive answers yet, we should all be monitoring communications and developments related to the major policy areas rather than simply sitting back and waiting to see what happens. Following this process should help you begin to develop strategies for your business or personal finances and be ready to implement those strategies once actual details are available.

Here are my thoughts on the major policy areas that you should monitor.

Trade Policy

This is the policy area that has the biggest potential to negatively impact to the economy. If a policy error occurs related to trade that results in a trade war, the economy will be negatively impacted. The last thing we want to see is a trade war. History shows us what happened the last time the US implemented major tariffs in an effort to protect US businesses. That occurred in the 1930s with the passage of the Smoot-Hawley Tariff Act and we all know how the economy performed during that time period.

The key to watch is whether the new President and Congress focus on being better negotiators of trade agreements versus taking a position that trade agreements are bad and should be stopped and/or exited. Negotiating better trade agreements should be a positive for the economy. Discontinuing existing trade agreements, imposing tariffs or no longer participating in trade agreements would be a negative for the economy.

Immigration Policy

Immigration policy is another area that holds the risk of creating a negative impact on the economy if executed poorly. There is a difference between stopping illegal immigration and stopping immigration. If Congress and the President focus on stopping illegal immigration while working to enhance and improve our current immigration policy, then the economy should benefit. If instead, they focus on shutting down or limiting overall immigration, the economy would suffer. The reality is that the US is a nation of immigrants and has depended on immigration throughout its history. That is still true today.

Tax Policy

Tax policy holds the potential to stimulate the economy immediately and potentially create long-term economic benefits that support higher economic growth. Immediate cuts in the personal and corporate tax rate hold the potential for an immediate positive impact to the economy. A true overhaul of the corporate tax system is where the real potential lies for long-term economic benefits. The facts show that the US currently has the highest corporate tax rate among the developed countries. It should not be surprising that corporations have pursued strategies to minimize their taxes given the current tax rate. The same is true for why they do not repatriate the cash from the profits generated by their overseas operations. If Congress and the President enact tax reform that makes the US a strong competitor versus the tax rates of other countries, then you may begin to see businesses bringing their foreign profits back to reinvest in their US operations. In a best case scenario, over the long-term, a competitive and efficient tax policy could cause companies to decide to keep their operations in the US because of the reformed tax structure.

Regulatory Policy

One of the consistent messages that businesses (especially small businesses) have given throughout this business cycle is the burden created by the increased regulations that have been issued since the financial crisis. In conversations with many small businesses, the feedback I hear is that they are being forced to hire a full-time, non-revenue generating employee simply to stay up with the compliance and reporting requirements. What will be important to monitor is whether Congress and the President can find the ability to structure regulations that are nuanced enough to prevent the abuse that they are designed to address while avoiding a “one size fits all” approach that has an outsized impact on firms that present the least risk of committing the abuse. Small business remains the engine of growth for the US economy. So, any type of regulatory relief for small businesses should be a net positive for economic growth.

Fiscal Policy

Throughout this business cycle, fiscal policy has been virtually non-existent due to the stalemate that has existed in Congress. As a result, we have seen the Federal Reserve conducting unorthodox monetary policy in an effort to fill the gap created by gridlocked fiscal policy. Now that the Republicans have swept Congress and the Presidency, the hope is that fiscal policy can resume its role as part of our overall economic structure. Effective fiscal policy should be positive for the economy. The hot area of discussion during the campaign was major infrastructure legislation. There is already debate going on as to how an infrastructure program should look and be funded. This could be the first major test as to whether the Republican Party will work together.

Monetary Policy

Although monetary policy is independent from Congress and the President, it will be important to monitor comments and speeches from Federal Reserve governors and regional presidents. If Congress and the President successfully work together and implement policies that stimulate the economy, then the Federal Reserve may well move to raise interest rates at a faster pace than they have. If Congress and the President do not work together and we continue to have gridlock, then the Federal Reserve will probably be forced to continue with their cautious approach to interest rates.

Currently, post-election surveys show rising optimism and confidence that change will occur and good things will happen to the economy. The potential is clearly there but we are early in the process. Monitoring developments in the above policy areas should help identify opportunities that may arise.

 

The views or opinions in this article are those of the author and do not necessarily represent the views of Washington Trust Bank or senior management. Washington Trust Bank believes that the information used in this blog was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinions expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.

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