US Fiscal Policy: The Clinton and Trump Timelines – Rabobank

Philip, Marey, Senior US Strategist at Rabobank, suggests that both Clinton and Trump want to provide the US economy with a much needed fiscal policy stimulus but the timing, size, shape and funding of the fiscal impulse will also depend on the election outcome for the Senate and the House of Representatives.

Key Quotes

“The fiscal impulse will be larger and reach the economy earlier if one party controls both the White House and the Congress. In case of Divided Government, it will take more time to negotiate an agreement on a fiscal policy stimulus package, which may also get complicated by negotiations on the debt limit and a continuing resolution needed to avert a government shutdown. This package may be limited to infrastructure, which is one of the few topics both parties agree on.

The fiscal policy plans have different effects on the distribution of income. A Clinton administration will be beneficial to middle and lower income groups, but have adverse effects on high incomes and corporations. A Trump presidency will benefit high income groups and businesses the most.

The effects of the fiscal policy plans on economic sectors will be asymmetric. A Clinton administration will be beneficial to the renewable energy sector, but have adverse effects on the fossil energy industry and the pharmaceutical sector. A Trump presidency will benefit the fossil energy sector and the defense industry. Infrastructure is likely to benefit under both presidencies.

Unfortunately, the impact of the fiscal impulse will be weakened by protectionism (especially in case of a Trump trade war which could break out in early 2017) and increased regulation in case of a Clinton presidency. In case of a trade war, the first negative domestic impact will be on US importing firms, followed by US exporting firms if trading partners retaliate. Even services firms in trade intensive regions may be affected negatively.

The more effective the fiscal impulse, the faster the Fed can hike in 2017 and beyond. Both effects should have an upward impact on rates. However, episodes of risk aversion due to trade conflicts (especially in case of a Trump presidency) or budget standoffs (in case of Divided Government) could push rates down again temporarily. In case of a full scale trade war this downward effect will be more sustained, especially if the economy falls into recession.

A President Trump is expected to replace current Fed Chair Yellen when her term expires in February 2018, which could lead to the Fed changing its course. A President Clinton is expected to reappoint Yellen, which would allow the Fed to continue its ‘cautious and gradual’ hiking path.

By the time the new President runs for re-election, four years may have passed without a serious effort to curb the unsustainable spending on entitlement programs and the rising public debt.”