Clinton & Trump Unveil Very Different Economic Plans
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
August 16, 2016
- Atlanta Fed’s GDPNow Forecasts Growth of 3.5% in the 3Q
- What Could the Fed be Seeing to Make It So Optimistic?
- Clinton Economic Plan: Higher Taxes, Spending & More Government
- Trump Economic Plan: Looks a Lot Like Reagan’s Tax Reforms
- Which National Economic Plan is Better? Kudlow Weighs In
Former Secretary of State Hillary Clinton and New York billionaire Donald Trump both announced their major plans for the economy last week, if elected president in November. As you might expect, the two plans are very different. I will summarize both as we go along today, and you can draw your own conclusions.
Before we get to that discussion, I want to bring to your attention the fact that the Atlanta Fed is forecasting a significant improvement in the US economy for the current 3Q. As you may recall, the Atlanta Fed produces a real-time estimate of the US economy which is called “GDPNow.” As of last Friday, the GDPNow is forecasting a jump to 3.5% in GDP in the 3Q.
Keep in mind that US GDP was only 0.8% in the 1Q and 1.2% in the 2Q. A strong jump to 3.5% in the 3Q would be almost triple the anemic 1.2% in the 2Q. The obvious question is, what is the Fed seeing so far in this July to September quarter that is making it so confident? That’s what we’ll talk about just below.
Atlanta Fed’s GDPNow Forecasts Growth of 3.5% in the 3Q
Historically, we had to track gross domestic product by waiting a month after the end of a quarter for the Commerce Department to give us a preliminary estimate followed by two more revisions in the second and third month after the end of a quarter.
However, starting in mid-2014, the Federal Reserve Bank of Atlanta began producing a more time-sensitive estimate of gross domestic product which it aptly-named GDPNow. This rolling estimate takes into account the latest economic data in an effort to give us a snapshot of where the economy is today. The estimate is updated at least once a week.
The presentation of the GDPNow report is a little odd if you ask me. As you can see in the chart below, the recent GDPNow forecasts are shown in the green line above right. These forecasts are shown compared to the best and worst recent forecasts from independent contributors to the Blue Chip Economic Indicators, a digest of economic prognosticators.
The Atlanta Fed GDPNow forecast has been above the Blue Chip consensus this year. Both forecasts took a turn higher beginning in late July. The Blue Chip consensus has improved to a reading of apprx. 2.8%, while the GDPNow forecast has jumped even higher, currently at 3.5%. It was up to 3.8% earlier this month.
What Could the Fed Be Seeing to Make It So Optimistic?
The obvious question is, what is the Atlanta Fed seeing in the data to make it confident that GDP growth will almost triple (3.5%) in the 3Q from the weak 2Q (1.2%)? And why is GDPNow so much stronger than the Blue Chip consensus of 2.8%? FYI, the last time we saw GDP growth of 3.5% or higher was in the 3Q of 2014.
The Atlanta Fed’s Pat Higgins, an economist and the creator of the GDPNow forecast, does not offer much in the way of analysis of the numbers week in and week out. What he has shared since late July is that he’s seeing a strong rebound in business inventories this year.
Business inventories have been contracting since early 2012. Falling inventories count as a reduction to GDP, while rising stockpiles are an increase. As you’ll see in the chart below, business inventories have turned higher so far this year, but not sharply higher.
Business inventories rose only modestly in June (latest data available) and in May. The Atlanta Fed must believe this trend toward rising inventories is going to accelerate in the weeks and months ahead. That remains to be seen, of course.
Therefore, it also remains to be seen whether the Atlanta Fed’s GDPNow forecast will remain at the current 3.5% level for the 3Q, or if it will have to be revised lower in the weeks ahead. We won’t see the Commerce Department’s first estimate of 3Q GDP until the end of October.
Based on all the economic reports I review each week, I don’t see the economy rebounding to 3.5% GDP in the current quarter. Again, that would be almost triple what we saw in the 2Q. We’ve had two stronger than expected jobs reports in a row, but that is hardly enough to justify a GDP jump to 3.5% from 1.2% in the 2Q and 0.8% in the 1Q.
Finally, I hope this is not a case of the Fed making the economy look stronger than it really is just ahead of the election, only to revise it lower afterward. Call me cynical, but it has happened before. We’ll see.
Now let’s move on to our main topic today, Trump and Hillary’s latest economic plans.
Clinton Economic Plan: Higher Taxes, Spending & More Government
Last Thursday, Hillary Clinton laid out her ambitious plan to jump-start the economy but upon examining the plan further, it may do just the opposite.
Her plan includes raising income taxes by $1.2 trillion over 10 years with over 90% of the burden on America’s top 5% highest earning households. The top 1% of households, for example, would see their tax burden go up by $78,000 a year on average according to the non-partisan Tax Policy Center.
But there’s more. She would also impose the so-called “Buffett Rule,” requiring those with adjusted gross incomes over $1 million to pay a minimum of 30% of their income in taxes. On top of that, she would impose a 4% surcharge on adjusted gross incomes over $5 million.
Clinton also plans to make it harder to claim capital gains, which today are taxed at 20% on realized gains from investments held for more than one year. She would require investments to be held for more than six years to qualify for that same rate. Anything less would be taxed on a “sliding scale.” Investors would pay the “ordinary income” tax on capital gains from investments held less than two years.
The “Death Tax”: Clinton would tax estates worth more than $3.5 million ($7 million for married couples.) That’s below today’s estate tax exemption level of $5.45 million ($10.9 million for couples). She would also raise the top estate tax rate from 40% to 45%.
On the Big Government side, she wants to increase federal spending by $1.4 trillion over 10 years. She says she wants to give tax cuts to lower income Americans but lacks specifics on how to pay for it. Her plan would require companies with 50 or more employees to offer 12 weeks of paid family or medical leave per