That Trump Boom seems less likely, making Walker budget less likely to work

In what is starting to become a consistently vital column for me, Stan Collender in Forbes notes that any "Trump Boom" that might happen won't be felt for a few years, if ever. Collender spells out the timing of the budgetary changes and economic impacts in this manner.

For example, while Trump said he wants to increase the military budget by up to $40 billion this year, the truth is that very little of that will be spent quickly. Even if Congress includes the additional funding in the continuing resolution that will be needed by April 29th to prevent a government shutdown, which is hardly a sure thing, most of these additional funds will be devoted to procurement and that spends out very slowly. If the historical pattern holds, no more than about $4 billion of the $40 billion will be spent in calendar year 2017, an insignificant amount in a total U.S. economy that is approaching $19 trillion.

Infrastructure is another example. The Trump plan supposedly is for $1 trillion in new spending over the next 10 years. But in spite of all the talk about “shovel-ready,” the truth is that infrastructure projects are notorious for how long they take to begin. Here too, unless the new projects are a sharp departure from all previous experience with infrastructure, very little – as in almost none – will be started in 2017 and only a handful of projects will begin in 2018. The biggest economic impact will start to be felt in 2019-2020. Then there’s tax reform.

The Trump administration said last week that it wanted to have a tax plan in place by the start of Congress’ August recess. That’s only five months from now. Congress would find this schedule difficult to follow if it was dealing with a noncontroversial issue like the naming of a post office for a just-deceased member of Congress.

But given the multiple enormous controversies surrounding tax reform and the extraordinary procedural impediments to getting it passed in the House and Senate, getting tax reform enacted by the end of this July will be a legislative miracle. Even a more likely December 31, 2017, is starting to look like a reach.

And this delay is setting up to be a real problem for Scott Walker's budget, because that budget relied on higher revenues resulting from a Trump Boom. Remember what the Legislative Fiscal Bureau assumed when it gave its upwardly-revised revenue picture last month.

Under the January, 2017, forecast, IHS Marki! predicts real GDP growth of 2.3% in 2017, 2.6% in 2018, and 2.3% in 2019. The main drivers of growth are expected to be consumer spending, business fixed investment, and residential investment. However, the trade deficit is forecast to increase due to an appreciating U.S. dollar and growing domestic demand for imports, thereby dampening real GDP growth.

The 2017 forecast is based on the following key assumptions. First, the forecast assumes that the new Trump administration and Congress will lower the average effective personal income tax rate from 21.0% to 19.5% and lower the statutory corporate tax rate from 35% to 20% (partially offset by reducing tax deductions and credits). Second, the forecast also assumes a $250 billion increase in federal infrastructure spending over the next ten years. Third, the 2017 forecast assumes that the Federal Reserve will increase the federal funds rate by 75 basis points in each of the next three years to 1.50% by the end of 2017, 2.25% by the end of 2018, and 3.00% by the end of 2019. Fourth, the Brent spot crude oil price is projected to average $54 per barrel in 2017 and $57 per barrel in 2018. Fifth, the inflation-adjusted, trade-weighted value of the dollar for the broad index of U.S. trading partners is expected to increase 3.3% between fourth-quarter 2016 and fourth-quarter 2017, where it will reach its peak value at 5.5% above the 2016 average, followed by a steady decline. Finally, real GDP growth of major and other important U.S. trading partners is assumed to average 1.7% annually and 3.5% annually, respectively.

After looking at Collender's report, I wouldn't count on much of that coming true, at least to affect in calendar year 2017 (well except for oil prices to be even higher than the IHS Marki! projected).

Also, if you go further into that revenue estimate, note what LFB's forecaster admitted was a possible scenario. This one feels quite a bit closer to what's actually going to happen in the coming years.

IHS Markit's 2017 forecast also includes an optimistic scenario and a pessimistic scenario. Under the pessimistic scenario, the January, 2017, forecast assigns a 20% probability of a two-quarter economic contraction in the first half of 2018 due to strained trade relations with China and Mexico. U.S. exports decline more than imports, and economic conditions worsen across the world. The U.S. dollar increases in value, further undermining export competitiveness. U.S. businesses react by postponing capital investments. The stock market declines markedly, along with consumer confidence. Meanwhile, productivity continues to decline, and thus modest demand-side growth causes inflationary pressure. OPEC oil production cuts (which are not offset by increased domestic production) and inflation prompts the Federal Reserve to raise interest rates, further constricting growth. Under this scenario, disagreements between the new Trump administration and Congress, as well as a federal government hiring freeze, prevent stimulus spending. A~ a result, consumer and business confidence deteriorates, leading to declines in business investment, meager growth in consumer spending, and a fall in housing starts. Real GDP growth is estimated at 1.3% in 2017, -1.1% in 2018, and 1.9% in 2019. These growth rates are lower than the baseline forecast by 1.0% in 2017, 3.7% in 2018, and 0.4% in 2019.

A drop in real GDP growth for 2017 and a 2018 recession would also likely mean that 3.7 million jobs wouldn't be added in the next 2 years, nor would it increase personal income by a cumulative 10% in those 2 years (both are part of the LFB's projections). This would reduce the state revenue growth that is baked into Walker's budget, and when you add in the strong possibility that revenues will fall short in this current fiscal year and it seems likely that reductions in Walker's pre-election handouts will have to be done by the State Legislature, since the amount of funds available will be reduced.

By the way, this is BEFORE we account for the issue that's helping to delay these Trump stimulus measures and tax reforms- the repeal and/or changes to Obamacare. ACA "modifications" will likely restrict the U.S. economy even further, especially in the short term as people have to figure out what the GOP's changes mean for their situation, making them less likely to spend as much as they otherwise would (aka Scott Walker's favored excuse of "uncertainty"?).

So no, the mess in DC isn't helping an already dicey Wisconsin budget situation. Few want to admit this reality at either the US or Wisconsin Capitol yet, but much like other bad things going on in TrumpWorld and the GOP Congress, it's going to blow up in public sooner than later.