USA Will Not Hit Trump’s 3% Growth Target

Incoming administrations commonly attempt to stimulate the USA economy to produce more jobs and more economic growth. The promise of growth then supports the budget increases that they wish to enact. In Trump’s case he wants to dramatically increase defense spending and has promised tax cuts, infrastructure stimulus spending, reduced regulations and repatriation of offshore corporate cash. These wishes may or may not become reality. But, even if they do, how much of an increase in economic growth will occur? Bloomberg reports that the IMF calls Trump’s growth target unlikely and cuts their projection for US GDP growth for both 2017 and 2018 to 2.1%.

The world’s biggest economy will probably have a hard time hitting Trump’s target of 3 percent annual growth as it’s faced with problems ranging from an aging population to low productivity growth, and with a labor market already back at full employment, the fund said in its annual assessment of the U.S. economy released Tuesday.

Given broad uncertainty on policy, “we have removed the assumed fiscal stimulus from our forecast,” Alejandro Werner, director of the IMF’s Western Hemisphere Department, said at a press briefing in Washington.

The IMF’s assessment casts doubt over a more optimistic forecast in the White House budget proposal, which projects growth will accelerate to 3 percent by 2020 and keep up that pace for seven more years. Even with an “ideal constellation of pro-growth policies, the potential growth dividend is likely to be less than that projected in the budget and will take longer to materialize,” the IMF said in a statement Tuesday.

As is often the case with new administrations there is a lot of hype and wishful thinking. But economic growth requires population growth and that is not going to pick up steam, especially if Trump wants to curtail immigration of willing workers. Over next few years this means a weaker US dollar. But, what does this mean for the US dollar in the shorter term?

Where Is the Dollar Going Today?

CNBC reports that not all analysts expect to see the dollar fall. One thinks that the US dollar will strength going forward based on aggressive rate increases by the Fed.

“The Fed seems to have changed its policy response function. Yes it’s going to pay attention to the data, but less so. It now wants to get its rates normalized so that it actually has room to cut rates in the next downturn,” Forrester said.

“Let’s not forget here: The U.S. expansion, while being soft, is actually pretty mature so the Fed is getting lined up here in preparation for the next downturn. That’s why we think they’re going to hike rates and we will see a steepening of the U.S. Treasury curve and that will be supportive of the U.S. going forward.”

Credit Agricole expects the Fed to hike rates once more this year, followed by three times in 2018.

By this way of thinking slow and steady rate increases will continue and support if not strengthen the US dollar.