It seems that I am never able to stray far from Niels Bohr’s statement, “Prediction is very difficult, especially when it pertains to the future.” But even by those standards, at this moment in time we are faced with big changes in so many variables that it’s all but impossible to have a vision of the future.
But we invest because we have an expectation of future returns and so we are forever having to look into the future and make our best educated guesses. Here’s a few, and like in our last article, I will restrict myself only to potential impacts on investments and the economy.
Tariffs
Donald Trump is the self-proclaimed “Tariff Man” and has called “Tariff”, “the most beautiful word.” It is widely believed in the investment world that tariffs will be implemented and that they will create inflation. But will that actually happen? It’s very hard to know. In the first Trump administration tariffs were largely industry specific, such as large tariffs on imported Steel. This did create higher prices for steel in the US, but it did not have much effect on finished goods. Ford Motor Company CEO Jim Hacket stated that tariffs had cost his company $1 billion in profits. That would imply that the added cost of steel hurt Ford’s bottom line because they were not able to raise prices enough to compensate for it. In other words, it appears that the impact of tariffs on steel may have had little or no impact on inflation.
But before can say that based on that history we should not be expecting inflation, consider how widespread Mr. Trump wants tariffs to be now. He’s effectively talking about all imported goods and probably services.
According to Statista, imports make up roughly 15.5% of the US economy. Broad general tariffs on all imports will increase the cost of all of those goods and services. If we assume that tariffs will average out to somewhere around 20%, a guess, then you’d expect the impact on inflation to be an increase of 4%. That’s huge. But nothing in the US economy is that simple. The US economy is the largest and most diverse and most complex economy in the world. All we can really say is that tariffs will certainly create upward pressure on prices. Will that result in lower corporate profits, like Ford complained about, or higher consumer prices, or a combination of both? It’s very difficult to forecast this but we can definitely assume upward pressure.
Immigration
Mr. Trump wants to deport all undocumented people in the US. That’s an estimated 10.5 million people and personnel are already being lined up to make this come true. Will deportations ever reach 10.5 million or will it be some lessor number determined by the logistics involved in the shear size of the effort? Let’s assume it’s ultimately a smaller number and just to take a wild guess, let’s assume 5 million people ultimately get deported.
One of the very interesting things about undocumented immigrants is that they have a large percentage of employment. Assuming that these immigrants have non-working children and other family members, their roughly 68% employment level is very high. Deporting roughly 3 million workers will take those people away from an economy that is already short of workers. Businesses that already have a difficult time hiring people, will have an even more difficult time, meaning they will likely have to raise wages not only in order to hire needed additional workers, but also to retain the ones they have. Labor costs are a significant part of the price of anything you buy so again, deportations clearly will put upward pressure on prices.
But at the same time, removing 5 million consumers from the US will lower overall total demand for goods and services. This will lessen the impact, but I don’t expect it to completely offset it. But it will also increase the likelihood of a recession. Broadly speaking there are two ways that an economy can grow – population growth and productivity growth. Mass deportations will likely cause at least a temporary population decline. This doesn’t guarantee a recession, but it does make it more likely.
Regulations
Department by department and agency by agency there is a common theme to Mr. Trump's picks to head these organizations that I have not seen mentioned in the press. In addition to being Trump loyalists, these people almost all seem to be the chief critics of the organizations they are being picked to head up. Add on the advisory committee called the Department of Government Efficiency, and it seems that aggressive regulation reduction can be expected. This was true during Trump’s first term, and it looks like it will be even more true in this second administration. Removing regulations is something that can be a healthy practice from time to time and clearly that is the view of a majority of investors.
Federal Budget
Elon Musk and Vivek Ramaswamy will head up something called the Department of Government Efficiency, though it’s not a government department. Their stated goal is to cut $2 trillion from the Federal budget while cutting 75% of the federal workforce. That would be roughly 1.5 million people getting laid off.
There’s considerable skepticism that these goals are possible. But no one should doubt that there will be budget cuts or that there will be layoffs. But this is as unpredictable as anything in this whole unpredictable slate of changes. For one thing, this DOGE has no power. It is only a consultant group. Further, there are quite a lot of laws that would have to be rewritten or removed before anything more than relatively small steps can be made. But no one should doubt that the man that headed up creating a new auto company that made battery electric cars mainstream when no one else could, and heads up SpaceX which has already accomplished astonishing things and is aggressively working on more, and who may be failing with X (formerly Twitter) but not without making radical changes, will bring radical changes to the Federal government.
Throughout Musk’s career he has consistently promised more than he has delivered, but what he has managed to deliver is often more and better than we have seen before. Take a ride in a Tesla or watch a SpaceX Falcon 9 booster automatically return to and land at Kennedy Space Center and you will see things I never thought I’d see in my life.
So many variables here, but I do expect that there will at least be some changes that even if far smaller than promised, will be significant.
And that means significant risk to the economy. Government is roughly one-third of the American economy. There is no question that we are running our government on a credit card that eventually must be paid. The question is what does paying it cost? As in the above discussion about immigration, reducing the size of government increases the chances of a recession.
Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, LLC is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, LLC and Cambridge are not affiliated.
Comments and questions can be sent to hal@getyourinsight.com. These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.