THE ECONOMY UNDER TRUMP: WHAT TO EXPECT

RICHARD P. VOITH, PH.DPRESIDENT AND PRINCIPAL ECONSULT SOLUTIONS INC

February 7, 2017

1.1 Uncertainty at Record Highs

1.2 Investors Remain Optimistic: S&P 500

PRESENTATION OVERVIEW

1. Where We Are

2. Trump Policies

3. Macroeconomic Impacts

4. Impacts by Sector

5. Conclusion

1.3

Where We Are: Conventional Facts vs. Alternative Facts

1. Global Population and Global Income 2. Employment Trends3. Unemployment Rate4. Inflation5. Federal Deficit 6. Federal Debt Payments7. State of Cities8. Labor and Capital 9. Immigration10.Relative Global Wages

2.0

2.1 Global Population & Global Income

China 19%

India 18%

United States 4%

Indonesia 4%Brazil 3%Russian Federation 2%Mexico 2%

Other Countries 53%

US 24%

China 15%

India 3%

Russia 2%Mexico 2%Brazil 2%Indonesia 1%

Other Coun-tries 51%

2.2 Employment Trends

Bill Clinton Barack ObamaGeorge W. Bush

69%Of Trump Supporters believe

the job situation has gotten worse

2.3 Unemployment Rate

George W. Bush Barack Obama

“I’ve seen numbers of 24% -- I actually saw a number of 42% unemployment. Forty-two percent” - Donald Trump, September 28,2015

2.4 Inflation

2.5

2.6 Federal Debt Payments

State of Cities: Philadelphia Population2.7

State of Cities: Philadelphia Investment2.8

State of Cities: Philadelphia Murders2.9

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

0

100

200

300

400

500

600

Hom

icid

es

2.10 Labor and Capital

2.11 Immigration: Net Migration

2.12 Immigration: Mexico

2.13 Global Relative Wages Adjusted for PPP

India

China

Mexico

Hunga

ryLa

tvia

Czech

Rep

ublic

Korea

Italy

Japa

nSpa

in

Sweden

France

United

King

dom

German

y

Canad

a

Netherl

ands

Norway

Switzerl

and

United

Stat

es

Luxe

mbourg

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

3.0 Forecasts of the Trump Economy

Mark Zandi Moody’s Analytics Tax Policy Center OECD

Annual US GDP Growth Rate Forecasts:

0.6% 2.3% 2.3%-3%

3.1 Trump’s Policies

Immigration

National Security

Tariffs vs. Weak Dollar

Deregulation

Infrastructure Investment

Federal Reserve

Repeal Affordable Care Act

Jawboning

Domestic International

– Key Features• Travel Ban 7 Majority Muslim Countries

– Reduced Legal and Illegal Immigration• Border Wall with Mexico

– Shorten H1B Visa Periods

3.2 Immigration

– Social Security and Demographics– National Competitiveness– Regulatory / Enforcement Costs

oWill Policies Improve Security?oWill Policies Improve the Competitiveness

of US Workers?

3.2 Macro Impacts: Immigration

– Key Features• Increased Military Expenditures• America First Policy

3.3 National Security

– Increased Economic Activity Near Term

– Rising Federal Debt or • Reduced Expenditures in Other Areas

– Greater Uncertainty for Global Business

3.3 Macro Impacts: National Security

– Key Features

• “Border Adjustments”• Weak Dollar Policy• Renegotiating or Opting Out of Treaties

3.4 Tariffs & Dollar

Macro Impacts: Tariffs and Dollar

– Higher Costs– Inflation– Reduced Imports– Higher Interest Rates

– Risks• Retaliation• Global Downturn• Where Will Global Companies Invest?

3.4

– Key Features• Reduced Environmental Regulation• Reduced Financial Regulation

– Increased Travel / Immigration Regulation

3.5 Deregulation

– Lower Costs for Businesses Near Term– Lower Costs for Infrastructure– Changing Health Costs– Increased Risks Associated with Bad

Financial Behavior

o Is Climate Change a Hoax?o Great Recession in Part Caused by Poorly

Regulated Shadow Banking

3.5 Macro Impacts: Deregulation

– Key Features• Simplification in Theory• Increased Complexity with Increased Use

of Tax Credits• Lower Marginal rates for High Income• Reduce or Eliminate Corporate Income Tax• Eliminate Carried Interest• Reduced Total Taxes

3.6 Tax Reform

– Corporate Income Tax Reduction/Reform will Improve Competitiveness

– Lower Marginal Rates on High Income • Higher Deficits• Higher Interest Rates• Greater Interest Paid on Debt

– Recession Risk in 3 years

3.6 Macro Impacts: Tax Reform

– Key Features• Trillion Dollar Infrastructure Investment• Tax Credits a Key Funding Sources

3.7 Infrastructure

– Increased Economic Activity– Potentially Higher Inflation/ Interest Rates

Improved Productivity

oWill Infrastructure Have Public Benefits ifo Guided Heavily by Private Profit?

3.7 Macro Impacts: Infrastructure

– Uncertainty About President Trump’s Intentions with Respect to the FED

– Loss of Independence Would Be a Disaster

3.8 Federal Reserve

– President Trump Views Himself as a Master Negotiator

– Most Believe that the Economy Is Too Complex to Effectively Deal on a One-off Basis

3.9 Jawboning

– Healthcare Is a Major Cost Element for Employers

– Healthcare Is a Major Player in Most State’s Economies

3.10 Repeal ACA

1. Education and Healthcare2. Manufacturing3. Finance4. Construction and Real Estate5. Retail 6. Energy7. Regions, Cities and Communities

4.0 Impacts By Sector/Area

– Uncertainty -> Inhibits Hiring and Growth

– Immigration• Negative for High Skilled Labor • Many Rural Doctors are Immigrants• Lost of Full Freight Students

4.1 Eds and Meds

– Tariffs • May Benefit if No Retaliation• Incentives to Move Plants Overseas if Retaliation• Disrupt Global Supply Chains

– Infrastructure• Enhances Productivity

– Higher Interest Rates Adversely Affect Cyclical Industries

– Mixed Bag for Auto Manufacturing

4.2 Manufacturing

• Deregulation– Boon to Finance, Short Term

• Immigration—– Talent Constraint – Services Can Be Produced Elsewhere

4.3 Finance

– Infrastructure Spending Improves Construction if Major Program Approved

– Real Estate at Risk From Higher Interest Rates

4.4 Construction and Real Estate

– Immigration • Disrupts Supply Chains• Lowers Labor Supply

– Continued Challenge from Online

4.5 Retail

– Deregulation• Boon to Fossil Fuel Suppliers, Pipelines • Negative for Some Rail Shippers• Negative for Renewable Energy

– Fossil fuel prices under continued pressure

4.6 Energy

– Immigration• Immigrants have been lifeblood of cities, some

rural communities– Tariffs

• Adversely affect ports and border communities – Energy

• Communities differentially affected by Climate Change

– Regulation: little impact in states that impose regulations anyway

4.7 Communities

– Huge Uncertainty

– Trade War or Capitulation?

– War or Capitulation?

– Is Trump Crazy or Crazy Like a Fox?

5.0 Conclusion