AMSCI Newsletter November-December 2024

The election of Donald Trump to another term as president has raised multiple questions about the impact his administration will have on the economy, given his campaign promises regarding issues such as the size of the regulatory state, the role of migrant workers, and what could be the most protectionist trade policy in nearly a century.

Trump and fellow Republicans – who will control both the House and Senate in the next Congress – are generally regarded as more pro-business than the Biden administration and Democrats, in general, in part because of their aversion to a heavy regulatory hand. However, plans for mass deportation and a tightening of border security could have a negative effect on certain businesses. Studies estimate that undocumented immigrants account for about 5 percent of all workers in the United States and are especially prevalent in such sectors as agriculture, construction and hospitality.

While Trump and others in the GOP argue that people who are in the United States illegally are taking jobs from American citizens and legal residents and driving up government spending, critics of mass deportation argue that the workers have a positive impact overall on the economy.

“There are millions, many millions, who are undocumented who are in the trades; we don’t have the Americans to do the work,” the CEO of a construction consulting firm told CNBC. “We need these workers. What we all want is for them to be documented. We want to know who they are, where they are, and make sure they are paying taxes. We don’t want them gone.”

On trade, meanwhile, Trump has pledged an aggressive implementation of tariffs. The president-elect wants to impose across-the-board levies on all imports of as much as 20 percent, with some goods, such as those from China, being subject to much higher rates. Economists generally regard tariffs as a drain on the economy that lead to trade wars and increase prices for consumers, but Trump says they will encourage the growth of domestic manufacturing and has proclaimed that, “Tariffs are the greatest thing ever invented.”

Notwithstanding uncertainties about the impact of Trump’s economic policies, his election produced a spike in stock prices in the four trading days following the election, though the markets gave back some of the gains in the next four days. The Dow Jones closed at 43,444.99 on Nov. 15 (up 2.9 percent from Election Day), while the S&P 500 ended the day at 5,870.62 (up 1.5 percent from Election Day). The dollar, meanwhile, was trading at 0.95 euros, 0.8 pounds, 154.61 yen and 7.23 yuan on Nov. 15.

The stalling of the markets’ post-election momentum might have been partly related to comments by Federal Reserve Chair Jerome Powell on Nov. 14 indicating that the central bank is not expecting to slash interest rates.

“The economy is not sending any signals that we need to be in a hurry to lower rates,” Powell said. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”

The Fed did reduce rates by a quarter-point at its Nov. 6-7 meeting. This followed a half-point reduction in September and brought the target range for the Federal Funds Rate to 4.5 to 4.75 percent.

“Recent indicators suggest that economic activity has continued to expand at a solid pace,” the Federal Reserve Federal Open Market Committee stated in announcing the cut. “Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.”

A leading measure of inflation, the Consumer Price Index from the Bureau of Labor Statistics, recorded an annualized rate of 2.6 percent in October. Core inflation – which excludes food and energy costs – was 3.3 percent for the previous 12 months. Prices went up by 0.2 percent from September to October, with higher shelter costs accounting for more than half of the overall month-to-month increase, the bureau reported.

The economy grew by 2.8 percent during the third quarter, according to the Bureau of Economic Analysis, which noted that the expansion “primarily reflected increases in consumer spending, exports, and federal government spending.”

The October Purchasing Managers Index from the Institute for Supply Management showed continued sluggishness among manufacturers, with the group’s measure of confidence falling further below the threshold indicating expansion in the sector.

“Demand remains subdued, as companies continue to show an unwillingness to invest in capital and inventory due to concerns (for example, inflation resurgence) about federal monetary policy direction in light of the fiscal policies proposed by both major parties,” the chair of the institute’s Manufacturing Business Survey Committee said.

Consumer confidence, though, showed a sharp increase in October, with The Conference Board’s Consumer Confidence Index rising nearly 10 percent from its September level.

“Consumer confidence recorded the strongest monthly gain since March 2021, but still did not break free of the narrow range that has prevailed over the past two years,” the organization’s chief economist said. “Consumers’ assessments of current business conditions turned positive. Views on the current availability of jobs rebounded after several months of weakness, potentially reflecting better labor market data. Compared to last month, consumers were substantially more optimistic about future business conditions and remained positive about future income.”

Housing starts in September were virtually unchanged from August and from September 2023, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales in September dipped 1 percent from August and were down 3.5 percent from a year earlier, the National Association of Realtors reported. However, the association’s chief economist said that “factors usually associated with higher home sales are developing,”

“There are more inventory choices for consumers, lower mortgage rates than a year ago, and continued job additions to the economy,” the chief economist said two weeks before Election Day. “Perhaps some consumers are hesitating about moving forward with a major expenditure like purchasing a home before the upcoming election.”

The median existing home sales price increased 3 percent year-over-year to $404,500.