SAN FRANCISCO (S&P Global Ratings) Nov. 7, 2024--As President-elect Donald Trump returns to the White House, S&P Global Ratings Economics offers its views on the potential economic implications. Forecasting remains challenging amid significant uncertainty about the timing, magnitude, and interactions of proposed tariffs, immigration reforms, tax cuts, and regulatory shifts. We will firm up changes to our U.S. macroeconomic forecasts over the coming weeks.

Uncertainty Ahead

Any cost or economic projections specific to the Trump campaign's platform are highly uncertain and difficult to calibrate at this point.  The Trump campaign has not released details on how the policies that would lower corporate taxes, reduce regulation, increase trade protectionism, and tighten border security would be structured or enforced. Changes to fiscal policy are likely to take effect after late 2025. On trade and immigration policies, it's still unknown how hard the president-elect will push campaign promises and how fast.

Major Proposals

The Trump campaign laid out major policy proposals: 

• A substantial increase in U.S. tariffs on imports (for example, a 10%-20% universal tariff excluding China, a 60%-100% tariff on China, and renewed threats of tariffs on Mexico);
• Immigration curbs (including mass deportations);
• Lower corporate taxes for companies that produce in the U.S. (to 15% from current 21%);
• Challenges to the Federal Reserve's long-held independence; and
• Incentives for greater use of fossil fuels through regulatory rollbacks and scaling back of renewable energy policies, including credits.

Legislative Challenges

The ability to pass new legislation depends on the makeup of Congress and the extent of deficit fatigue among legislators.  It's still too early to tell who will win control of the House of Representatives. Even if Republicans do (they have captured the Senate), it would likely not be easy to pass new legislation because of their potential slim majority. Moreover, deficit fatigue (resistance to growing the deficit, especially at full employment) could limit legislators to simply extending the 2017 Tax Cuts and Jobs Act tax cuts due to expire at the end of 2025.

Even with a Republican sweep, rolling back President Biden's climate and infrastructure policies could prove difficult, given Republican states have been major beneficiaries of the Inflation Reduction Act (IRA), CHIPS Act, and Infrastructure Investment and Jobs Act. But that doesn't rule out the possibility of partial repeals, particularly for the IRA, which could include capping or shortening the duration of availability for some tax credit incentives, eliminating the individual electric vehicle tax credit, and reversing regulations on emission standards.

Tax Cuts And The Economy

We do not anticipate tax cuts will meaningfully lift the economy's long-run potential.  Any tax cuts at this stage of the economic cycle (where the output gap is positive) would produce a smaller boost to growth than they would when there is slack in the economy. Fiscal multipliers of growth from greater stimulus are simply smaller at this point in the cycle.

Conceptually, a lower tax rate would reduce the user cost of capital for some industries and likely lead to higher investment. But history suggests not by much, with lower corporate taxes more likely to boost dividends and stock buybacks than investment.

Moreover, the negative growth impact of slower immigration growth (that is, the drag on labor supply growth) could more than offset any marginal positive growth impulse of capital deepening.

Long-Term Risks

Over the longer term, if spending cuts don't counterbalance tax cuts and our assumption of no increase in growth dynamics holds true, the federal budget deficit would likely increase.  This would likely lead to reduced national savings and higher interest rates. Barring such spending cuts, we expect the U.S.'s debt-to-GDP ratio to rise above an already elevated projection, with increasing interest costs consuming a greater share of the federal budget.

Executive Actions

The president has more freedom with executive actions when it comes to trade and immigration.  Legal scholars continue to debate whether tariff threats are legally implementable via executive action, but our sense is that "emergency" powers are at the president's disposal. President-elect Trump sees tariffs as a negotiation tool, even if certain countries and goods will be exempt.

Meanwhile, given an already meaningful slowdown in unlawful border crossings after Biden's 2024 actions, immigration curbs may end up smaller in scale (and phased in). That will likely mean a smaller negative impact on growth compared with the trend expected earlier in the year.

Inflation And GDP Growth

President-elect Trump's proposed economic plan, taken at face value, would add to inflation and dent GDP growth relative to our baseline outlook.  Assuming higher interest rates (as the Fed reacts to higher inflation expectations) and in-kind retaliation from trading partners, global financial markets would likely become more risk averse. Meanwhile, erosion of purchasing power from inflation would likely offset the economic benefit of proposed tax cuts, potentially resulting in a net drag on output and job creation.

The consumer price level would be higher in the first 12-18 months of tariff implementation--although that would be a one-off shift in prices, rather than having an ongoing inflationary effect. The Fed would likely react by slowing down its current policy easing with an eye on inflation risks, given its experience of 2021-2022 inflation persistency (when it argued supply-side inflation shock would be short-lived).

Interest Rates

The benchmark interest rate will likely be higher than in our current forecast.  The fed funds rate outlook will likely rise as the Fed focuses on keeping inflation expectations anchored. Higher short-rate expectations and term premium (amid higher inflation and interest rate uncertainty) mean a higher benchmark 10-year Treasury yield than previously expected over the next year.

Market Outlook

Once past its initial response, the global financial market is likely to become cautious (resulting in higher volatility), given the potential policy uncertainties.  Timing matters when it comes to the interaction between tariffs and business sentiment. A boost to business sentiment may be short-lived once tariffs come into view. Global financial markets would likely have a "risk-off" response to tit-for-tat tariffs and more restrictive interest rates, resulting in tighter financial conditions.

Investor Sentiment Risk

Any flare-up in investor concerns regarding fiscal sustainability could meaningfully increase the term premium.  Our current forecast assumes a steady state 3.4% U.S. 10-year Treasury yield, reflecting a 1.1% real neutral rate, 2% long-term inflation target, and 30-basis-point term premium. The unwinding of central bank balance sheets over the coming quarters is the main factor in the expected increase in the term premium (to roughly 30 basis points higher than today's estimate by the New York Fed's Adrian, Crump, and Moench model).

The risk is that if investor sentiment toward fiscal sustainability sours, the term premium could rise materially and bring unwelcome tightening of financial conditions. On the other hand, the Fed could decide to stop quantitative tightening and embark again on asset purchases to ease such tightening.