A hyperactive first week at the White House

Macro Highlights - 2/1/2017

The five executive orders and ten memoranda signed by D. Trump since his inauguration reflect his determination to quickly put his policy agenda into play. Far from being symbolic, these executive orders have the full force of law. D. Trump’s administration has raised the idea of applying an import tax to goods from countries with which the United States is running a trade deficit. This is putting pressure on international trade.

In the first week following his inauguration on 20 January, D. Trump signed five executive orders and 10 memoranda. His actions include withdrawing from the Trans-Pacific Partnership, restarting the Dakota Access Pipeline and Keystone XL Pipeline projects, taking the first steps against Obamacare, setting a freeze on federal government hiring and putting an immigration ban on travellers from Iraq, Iran, Yemen, Somalia, Libya, Syria and the Sudan, even if they hold a visa. D. Trump has made it very clear that he intends to enact his policy agenda quickly and pragmatically.

Far from being symbolic, these executive orders have the full force of law. The president, as the head of the executive branch of government, can use them to direct federal agencies on how to implement laws that have been passed by Congress and to allocate federal funds to certain projects. But executive orders are also a way for the president to force federal agencies to operate in a manner contrary to laws he doesn’t like, without the need for congressional approval. In his executive order on Obamacare, for example, D. Trump instructed the federal agencies to apply more exemptions and exceptions to the law in order to narrow its scope. The president clearly intends to repeal Obamacare and replace it with a congressionally approved law, but his executive order aimed at limiting the law’s “economic burden” is a first step in that direction (see left-hand table). During his tenure, B. Obama signed a total of 249 executive orders and 257 memoranda (see right-hand chart). Many of them came during the last two years of his presidency, when he faced a Republican majority in both the Senate and House of Representatives.**


 Two other factors favour D. Trump and his policy agenda. In addition to the executive orders, the president has significant constitutional authority in the country’s foreign affairs, national defence and treaty negotiations and implementation. Also, as was apparent in D. Trump’s most recent press conference with the Senate majority leader and the House Speaker, Congress is working very closely with the executive branch in a bid to implement as many measures as possible. House Speaker P. Ryan nevertheless noted that the legislative process would take time. This confirms our view that any new laws will not take effect before the end of 2017.

Investors have been caught somewhat off guard by D. Trump’s perseverance, which is becoming increasingly apparent with every executive order he announces. The construction sector reacted favourably to the executive order on building a wall between Mexico and the United States, while the industrial sector welcomed the order reviving the construction of oil pipelines.

Turning to economic data, US GDP expanded by an annual rate of 1.9% in the fourth quarter of 2016, just ahead of our forecast. Companies added to their inventories (see left-hand chart) and at the same time invested more in fixed capital. The mining industry in particular boosted its capital spending in the fourth quarter. On the other hand, the strong dollar weighed on exports and may continue to do so in the first quarter of this year (see right-hand chart).

Overall, 2016 was disappointing with average GDP growth of only 1.6% versus 2.6% in 2015. The main reason for this was the sharp fall in capital expenditure (see left-hand chart). Fears of a recession in early 2016 undermined the confidence of business leaders, who put their spending plans on hold until the economy stabilised. Higher oil prices should set the stage for oil companies to resume spending on machines and equipment, and this should boost US GDP growth in 2017.


In the area of international trade, the Trump administration raised the idea of applying a 20% tax on goods imported from Mexico in order to pay for the construction of a wall between the two countries. This tax could even be broadened in scope, applying to any country with which the United States is running a trade deficit. The lack of clarity over D. Trump’s international trade policy, if it persists, could have economic fallout. Mexican President E. Nieto reacted to these statements by cancelling a meeting scheduled for 31 January with D. Trump – who also reiterated his intention to renegotiate the North American Free Trade Agreement.


Just as with China, a trade war between Mexico and the United States would be bad for both countries. Mexico is highly dependent on the US economy and suffers from a lopsided trade structure: it has a USD 122.6 billion trade surplus with the United States but a significant trade deficit with the rest of the world (see charts). Rising domestic inflation, which is being fuelled by a depreciating peso in the face of widespread political uncertainty, is likely to force the central bank to tighten further its monetary policy at a time when GDP is struggling to get off the ground. If the United States applies a 20% import tax, Mexico would probably go into recession (-1.5% in 2017, according to our calculations, without taking into account secondary effects). From the US perspective, higher prices on imported goods would erode consumers’ purchasing power. The price of oil by-products, which account for 10% of Mexican exports to the United States, would go up if refineries passed the increase in production costs along to the end customer. In addition, Mexico is the United States’ second-largest export market and could very well respond with trade reprisals, such as in the agriculture sector.

In the Euro zone, the Markit Composite PMI index suggests that high private-sector growth in the fourth quarter of 2016 should remain on track in early 2017. After reaching 54.4 in December – its highest level in five and a half years – the index settled at 54.3 in January. The euro’s softness is lifting the private sector by increasing external demand for manufactured goods.


** Executive orders do not need to be approved by Congress, but they cannot violate existing laws or the Constitution. If Congress wants to overturn an executive order, it can pass a law to this effect. But the president can veto such a law, and Congress could only overrule the veto with a two-thirds majority. An executive order can also be challenged before the Supreme Court (whose ninth seat is still vacant). A federal judge, for example, partially suspended the implementation of D. Trump's executive order banning travellers from certain countries from setting foot on US territory. She deemed that blocking entry to people with a valid visa was unconstitutional.