Trump Budget Sees Jobless Rate Falling Sans Inflation Boost
(Bloomberg) -- President Donald Trump’s budget proposal counts on a unlikely mix of faster growth, lower unemployment and tame inflation. Like the spending request itself, the economic assumptions may turn out to be more wishlist than reality.
Inflation, based on the consumer price index, will average 2.1 percent in 2018, 2 percent next year and 2.3 percent in the long run, according to assumptions published Monday in the White House budget proposal. The economy is seen expanding 3.1 percent this year and 3.2 percent in 2019, following 2.5 percent in 2017. The jobless rate, currently 4.1 percent, may average 3.9 percent in 2018 and 3.7 percent in 2019.
The $4.4 trillion budget’s sanguine scenario for inflation contrasts with investor concerns -- which fueled the recent stock-market rout -- that a pickup in wages, supported by low unemployment, will lead to faster inflation and encourage the Federal Reserve to raise interest rates more rapidly.
While a decline in joblessness has yet to cause a big acceleration in worker pay or price pressures during this expansion, economists see the risks tilting higher in the wake of fiscal stimulus that includes a $300 billion federal spending package and $1.5 trillion in tax cuts.
The White House proposal, published by the Office of Management and Budget, shows the 2019 deficit nearly doubling from projections last year to $984 billion. The gap would total $7.1 trillion over the next decade and the budget would not come into balance. Congress is expected to all but ignore the budget proposal, which would slash entitlements and other domestic programs in favor of more outlays for the national defense and immigration enforcement.
The economy is also seen faring better under the new budget proposal relative to what economists had penciled in, although some analysts have begun to raise their estimates in response to details of the likely fiscal boost over the next two years.
Nonetheless, many of them have previously said that Trump’s goal of sustained growth of at least 3 percent will be a challenge. A faster economy, especially without a flare-up in inflation, would require a pickup in productivity, which has been bogged down for most of this expansion. The White House has argued that the tax legislation will increase output per hour as companies invest more, thereby holding down inflation.
“This is a very rosy scenario,” said Omair Sharif, Societe Generale’s senior U.S. economist in New York. “You’re assuming faster growth and lower unemployment but inflation just remains quiet.”
According to the median estimate of economists in a Bloomberg survey conducted earlier this month, gross domestic product will expand 2.7 percent in 2018, 2.3 percent next year and 2 percent in 2020. GDP has averaged a 2.2 percent advance since this expansion began in mid-2009. Economists in the survey also forecast the CPI will rise 2.3 percent this year, and 2.2 percent in 2019.
The budget assumptions also are more optimistic than those of the Fed, which sees a 1.8 percent growth pace as the economy’s long-run potential. Central bank officials put the long run unemployment rate at 4.6 percent, according to the median forecast in their last quarterly projection in December. Their so-called dot plot indicated three interest rate increases this year.
©2018 Bloomberg L.P.