Bouncy consumer confidence plus tax cuts will probably make a mini-boom in the US next year. But when the inevitable inflation storm hits, it will be someone elses fault
US president-elect Donald Trump is known for boasting: The beauty of me is that I am very rich. Its a comment that he hoped underline his independence from corporate lobbying and his prowess at making money.
Since his victory, most of America appears to be believe his property industry wheeler-dealing will turn an already fast-moving economy it was zipping along at a 3.2% annualised rate in the third quarter of 2016 into the stellar performer it was in the 1990s.
As an appetiser to this feast of growth, the US is about to get a rise in interest rates courtesy of the Federal Reserve, from the current 0.25%-0.5% target range to 0.5%-0.75%.
For the savers who form the backbone of the Trump electorate, it could be the first of many if the economic growth rate accelerates in 2017.
Fed chief Janet Yellen, who was once in Trumps sights as a Washington swamp dweller, will probably be declared a hero of the thrifty common man and woman when she makes the announcement on Wednesday. Yellen will talk of the strengthening manufacturing sector and the gathering momentum in the housebuilding industry. Retail sales are also buoyant, which is no surprise after surveys showed consumer confidence spiking in November.
To illustrate the faith consumers have in a Trump presidency, the Conference Board consumer confidence index shook off a dip in October to regain pre-recession levels. And the CNBC All-America Economic Survey found that the percentage of Americans who believe the economy will get better in the next year climbed by an unprecedented 17 points to 42% the highest it has been since Barack Obama was first elected in 2008.
During the election campaign, Yellen was circumspect about further interest rate rises, fearing that any green shoots would wither and die. This reticence dates back to the decision to raise interest rates last December the first increase in almost a decade when minutes of the Feds meeting revealed it had been a close call for some policymakers.
The new year brought a plunge in oil and share prices, and signs that global trade was weakening. Analysts scratched further rises from their forecasts.
Trumps win alters the character of the coming year. His nominee for Treasury secretary, Steven Mnuchin (pronounced Mi-new-chin) has already declared he wants to cut taxes as much for middle-income earners as for big business. The former Goldman Sachs deal-maker also wants to tear up business regulations to spur growth of 3% to 4%, year in, year out.
If the consumer confidence figures are anything to go by, a burst of high-street spending will trigger a mini-boom, with the tax cuts kicking in later in the year to keep the momentum going into 2018. But what then? The prospect is that inflation will take off, the dollar will soar and a rush of imports will send the balance of payments further into deficit. Inflation will hurt consumers, while an even stronger dollar depresses exports. USA Inc is already squealing about the dollar. To say they will be furiously lobbying the White House if it heads any higher must be an understatement.
Trump will want a scapegoat. Rather than Yellen, its likely to be the Chinese and any other trading partner deemed to be somehow ripping off US households. The Chinese, in Trumps map of global villains, get full access to US markets at artificially low prices following several years of currency manipulation. US companies also the president-elect alleges have their patented secrets stolen, and access to Chinese markets blocked.
He has so far backed away from a confrontation with Beijing, except for his acceptance of a call from the Taiwanese premier. But a trade war with China is a card he could still play if his mini-boom gets out of hand.
Read more: https://www.theguardian.com/business/2016/dec/11/trump-us-economy-boom-inflation-china