As micro- and macro-economic factors intersect thanks to incoming President-elect Donald Trump and an increasingly hawkish Federal Reserve, conditions for businesses might be impacted in a few different ways. While the Fed’s stated goal of normalizing monetary policy could lead to higher costs of doing business, their intent also signals confidence in a US economy that is improving fundamentally.
Trump’s incoming administration comes with a high degree of uncertainty, which has further muddled the economic outlook for 2017 and beyond. However, there are positive signs in his recent statements. Trump has already outlined plans for corporate tax reform and fiscal spending that could lead to improving economic conditions, especially as the dollar rises and cash is repatriated to the US. The Fed’s ambitious plan of three interest rate hikes in 2017 will raise borrowing costs, but at the same time, will go ahead and improve the overall investment environment.
What Trump’s Presidency Means for Business
While doom-and-gloom predictions seemed to abound following Trump’s electoral victory, most of those claims have rung hollow as markets continue to grow and economic conditions hold up. The US dollar has been on a tear against a basket of its major peers, and it has remained largely above the headwinds that have held down other developed economies.
Trump has stated that he will push aggressively to expand fiscal spending, with heavy investment in infrastructure development. Combined with the Fed’s plan for monetary policy normalization, these factors could push for a run higher for the dollar over the medium term. The President-elect has been vocal about his intentions of bringing businesses back to the US via a combination of harsher consequences and tax incentives.
By creating conditions that benefit companies that bring their business back into the US, Trump could cause a major inflow of cash back into the country. For businesses already in the country, this could mean positive benefits in the form of tax cuts, incentives, and other cash-flow benefits. Taken together, Trump could have a great impact on business in the US.
Fed Adds to Benefits
Adding to the “Trump Boost” felt by markets over the past two months, the Federal Reserve’s decision to raise interest rates for the first time since 2015 has also added confidence in markets. With their ambitious plan to raise rates three further times over 2017, the Fed has set the stage for an impressive rally in the US dollar. The Fed’s hawkish tone can also be seen as a vote of confidence in a US economy that has shown stunning improvement over the previous year.
The Fed will also go against the grain in 2017, when most other central banks are holding fast to looser monetary policy in hopes of spurring inflation. This will create a strong divergence between the dollar and its major peers (especially currencies such as the Euro, Pound, and the Yen). For the business environment, rising rates might
Business Environment Shifting
Trump’s business-first approach, combined with a more hawkish Fed, could potentially accelerate the US’ economic expansion even further, providing a much friendlier environment for business spending and investment over the coming years. Despite rising rates for borrowing, a strong vote of confidence in the economic outlook can also improve business sentiment and spur microeconomic growth. Companies that were holding on to cash out of fear of recession or a downturn will now be more encouraged to spend on expanding.
However, spending is likely to be measured, as increasing costs of borrowing also mean that companies must be judicious when entering debt to finance growth. However, the cost of borrowing should be offset by higher rates of consumer spending when the economy is healthier. Even small businesses have felt the impact of recovery, with survival rates for small businesses at the highest level in three decades. The amount of companies that remain open past five years improved to 48.7%.
In spite of the fact that business financing costs may rise over the medium-term due to rate hikes from the Federal Reserve, a stronger investment environment is a net positive for the private sector. When combined with proposed tax reform measures, any fiscal policy adjustments should also help buoy businesses over the longer-term, especially if policy is able to overcome the fractured political environment.
© EconMatters All Rights Reserved | Facebook | Twitter | YouTube | Email Digest | Kindle