‘Trumpenomics’ in the short-run points to the reversal of executive orders, investment decisions being held back, loosened bank regulations, and expectations of inflation
By James Doti
2017 U.S. Forecast
President-elect Trump’s campaign proposals will change our nation’s economic landscape. In the long-run, “Trumpenomics” is likely to bring about regulatory reform, tax cuts, increased spending on defense and infrastructure, and some sort of Obamacare “fix.” Trumpenomics in the short-run points to the reversal of executive orders, investment decisions being held back, loosened bank regulations and expectations of inflation.
With tax cuts and increased spending looming, the Federal Reserve Board is likely to be more resolute than ever about raising the federal funds rate, which is likely, in turn, to push up other short-term interest rates. If that were to narrow the difference between short- and long-term rates, it may be a warning of recession. Every recession has been preceded by the interest rate spread (the difference between the 10-year T-bond and the 90-day T-bill) falling below zero.
There is no reason to believe in the coming year that the interest rate spread will turn negative. Not only do these findings rule out a recessionary call, but we are forecasting that the recovery will pick up steam, with real GDP growth increasing from 1.6 percent in 2016 to 2.4 percent in 2017.
2017 California Forecast
Since 2017, California has outperformed the nation in job growth. That is due, in large part, to the Silicon Valley’s disproportionately high growth in job numbers and wage/salary levels in the high-paying information services sector. But growth in those jobs has dropped back sharply since early last year, and a number of factors suggest a continuing downward spiral, albeit at a slower rate. This Silicon Valley slowdown will have a significant impact on the state’s overall economy.
Another factor expected to constrain job growth in California next year is a slowdown in construction, with total building permit valuation declining from a 4.1 percent growth rate in 2016 to 3.2 percent in 2017.
Our Chapman model suggests that these negative forces will be offset, in part, by stronger growth in real GDP and imports into California. While imports are subtracted from U.S. real GDP growth, they serve as a positive proxy for the extensive trade and distribution services in California. Barring any Trump-induced changes in trade pacts and tariffs, at least in 2017, the recent depreciation in exchange rate values points to a pickup in imports flowing through California from the state’s major markets, China, Mexico, Japan and Canada.
Our forecast calls for employment growth in the state to slow from 2.5 percent in 2016 to 2.1 percent in 2017. While we see California job growth slowing to 2.1 percent next year, this will still outpace our U.S. forecast of 1.8 percent job growth.
2017 Orange County Forecast
From 2012 to 2016, the average annual percentage increase in jobs was 2.7 percent in both Orange County and California. But there are structural differences in the engines of growth. Orange County exceeded California in job growth in construction and financial activities. But Orange County actually lost several thousand manufacturing jobs, while California gained 31,000. California’s greater strength, however, is explained by the fact that about half of the new manufacturing jobs were in the Silicon Valley. Similarly, California’s job growth in the information services sector was more rapid in Orange County’s.
Overall, we are forecasting that Orange County will outperform both the state and the nation, with 2.5 percent job growth in 2017.
An area of concern for Orange County’s future is the continuing decline in housing affordability. This problem can be seen clearly in the ratio of median home price to median income. In 2016, Orange County’s ratio of 8.3 is extraordinarily high as compared with the U.S. ratio of 3.3 and even California’s ratio of 6.0. And given our forecasts for higher mortgage rates as well as housing appreciation near 6 percent in Orange County next year, we see this affordability gap widening in 2017.
Are current housing prices in the county in “bubble” territory? We believe so. We do not, however, expect that inflating bubble to burst in 2017. Even though mortgage rates are increasing, the tight supply of unsold housing, coupled with strong rental demand, will keep prices appreciating.
James L. Doti, Ph.D., has served as Chapman University’s president since 1991. He is President of Emeritus, Donald Bren Distinguished Chair of Business and Economics. He may be reached at email@example.com.