Wells Fargo Post Election U.S. Review Much to Absorb Despite Sparse Data Calendar

The economic data calendar was mercifully light this week as the U.S. presidential election took center stage. The NFIB relayed a generally optimistic tone from small businesses in October, as the measure increased to its highest point in 2016. The Job Openings and Labor Turnover Survey (JOLTS) report reiterated that the labor market was steady in September, with monthly fluctuations near cycle-highs as the economy continues toward full employment. Voluntary quits are on the rise, which signals confidence among workers that they can find another job and generally results in wage increases. The tight labor market is increasingly a top concern for small businesses looking to fill open positions or retain talent. Data continue to suggest the labor market is at “full employment”—a topic we closely examine in our series of special reports available on our website or by request. We observe that, although the economy is near “full employment” on the aggregate, job growth varies widely by industry, skill level and geography, leaving many workers persistently under- or unemployed. Disconnect between data and experience was an interesting theme in this historic week.

Donald Trump’s surprising victory will have little direct impact in the near-term but will likely have a more significant impact on the medium term outlook. The initial shock of the election and the uncertainty surrounding new policy objectives will likely bring about volatility in the markets. At the same time, relief that the election is finally over could boost consumer confidence temporarily, though the impact is usually short lived and does not historically flow through to actual spending decisions. Consumer spending is more likely impacted by underlying fundamentals, which appear to be mostly sound. Decisions about timing of business investment could be impacted as policy priorities of the new administration become clearer. Close attention will be paid to how Trump goes about building his cabinet and relationships with congressional leadership. Uncertainty is likely to rattle the markets, but we expect the impact to be short-lived. We look for the financial markets to sync with Trump’s economic policies of lower taxes, infrastructure and defense spending, regulatory reform and a new deal on international trade.

We are leaving our near-term forecast largely unchanged, as time will be needed for President-elect Trump to formulate new policies and move them through congress. The impact is more likely to become apparent in 2018 than in 2017. Initiatives to reform trade and immigration will also take time to formulate and implement. The net result should produce a slight near-term drag on growth and push inflation and interest rates higher.

In situations such as this, the value of the University of Michigan Consumer Sentiment Report cannot be overstated. Preliminary results for November are released tomorrow, which will provide a helpful baseline to measure the impact of the Trump election on the American consumer—the driving force of the economy. When the final results are released later in the month, we will look to changes in the expectations index for hints of changing attitudes.

In our view, the Fed is still poised to raise rates in December as the market reaction to Trump’s victory appears somewhat settled.

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