Whither the US in 2018? US and the Americas and Globally

We conclude 2017, clinging tightly to a still uncertain confidence that job expansion and strong consumer spending can somehow continue, that advancing gains in the capital markets will persist and the promise of global growth engines in China and India, the world’s two most populous countries, is realistic. Growth projections are now pushing north of three percent – and yet there is an uneasy undertow to such an outlook for investors. 

Investors understand that what goes up may come down, and that markets thrive on perceptions, sometimes accurate and sometimes not so accurate. It’s especially problematic when there is a growing disconnect between the success of the markets and the politics of the country being managed by a leadership that eschews governing.  As the Trump administration attempts to fundamentally rewire both the domestic political and regulatory discourse as well as America’s role in the Northern Hemisphere and internationally, confidence in the markets and the economy is sure to be tested.

Much of this is not new. What is new, however, is a growing awareness of the potential for disruption due to such disinterest and/or lack of seriousness about the governance of government as well as the value of longstanding relationships with allies. This is not to say that treaties that are now thirty-plus years old should not be re-examined and then re-negotiated to update terms. It is to say however that upending norms requires thoughtful, skillful and in-depth knowledge about the advantages and the pitfalls of what has gone before.

Whether it’s about trade, deregulation or staffing the offices of government to get the work of government underway, there is the threat that the depth of the disconnect we sense between the economy and politics in the United States is grist for policy error and wider geo-political risk.

On trade, the Trump administration signaled its unequivocal preference for bilateral over multilateral agreements when the President pulled Washington out of what was then the 12-country Trans-Pacific Partnership (TPP) trade deal negotiation within days of assuming office.  Trump since then has disparaged major economies with US trade surpluses as harmful to US business and manufacturing interests. He has also put Mexico and Canada on notice about his intentions to re-negotiate new terms that favor “America First” under the North Atlantic Free Trade Agreement (NAFTA).

“We are in the NAFTA (worst trade deal ever made) renegotiation process with Mexico & Canada. Both being difficult, may have to terminate?”, Trump tweeted in August. While the rhetoric has cooled somewhat and a round of talks was completed in October, populist political rhetoric is surfacing in Mexico. Early stage rhetoric in the 2018 presidential race is shaping that contest into a referendum on which candidate will stand up to Donald Trump.  What has been a longstanding strong and vital relationship is now under deep strain as represented in the populist-tinged jabs on both sides of the shared 2,000-mile border.

While the ruling Institutional Revolutionary Party (PRI) party has yet to name their candidate, a fiery leftist presidential contender and former Mexico City mayor, Andres Manuel Lopez Obrador, is an early front-runner with the help of his Trumpian rhetoric.  Obrador publicly describes Trump as an “irresponsible bully” and promises to turn down any deal on NAFTA that is not in Mexico’s favor. 

A fractured US/Mexico relationship and a less than favorable trade agreement for any and all of the three countries in NAFTA would portend major changes for manufacturing and businesses that are dependent on global supply chains as well as for the consumers who have benefitted. Since the agreement took effect in 1994, US trade with Mexico and Canada has more than tripled while Mexico and Canada now rank as the second and third largest exporters to the United States after China. Both also are leading importers of US products.  Similarly, the political relationship has been and will be impacted, notably on the issues of immigration and illegal drug trafficking.

On the regulatory front, President Trump now has in place his senior-most appointees in each of the government’s key agencies and who are poised to implement his intended deregulation of business and the post-crisis financial sector.  Still, these appointees, ranging from the US Treasury secretary to the chairs of the SEC and the Federal Reserve must deal with two critical circumstances. On the one hand, second, third and fourth-tier positions in each agency have yet to be filled – and may never be filled under this White House’s stated intention to reduce government’s footprint.  On the other, the individuals with the titles may find that outsized problems quickly overwhelm decision-making at the same time that staff is not in place to keep the government’s working. 

Such indifference by a White House to the mechanics of governing is striking. It threatens the delivery of services to citizens at home and the capacity of Washington to further America’s influence in global decision-making and rule-setting.  Part and parcel of the emerging Trumpian view, the indifference reflects a much more narrowly defined participation in global relations than was the case with his predecessors.

As of December 6, the number of Trump appointments and US Senate confirmations has lagged considerably behind that of his two predecessors at the same point in time in their administrations.  Of the 4,000 jobs a president has opportunity to fill, 1,200 require Senate confirmation.

As of December 6, 253 Trump nominees have been confirmed; and 492 are pending.  At the same point in the first term of Barack Obama, nearly twice as many, or 413 had been appointed and confirmed; and 616 were pending; George W. Bush had 481 confirmed; 705 pending.

The implications of this indifference to the mechanics of building and maintaining government’s capacity to deliver services and advance US interests abroad may be slow to register when considered side by side with the immediate successes of the economy this White House inherited and now basis in. But they will register, and not only for investors.