The fiscal stimulus proposed by President-elect Donald Trump will come at a time of relatively low unemployment, leading to high levels of wage inflation for the US, says AllianceBernstein (AB).
A new report by AllianceBernstein US economist Joseph Carson compares the fiscal stimulus planned by President-elect Donald Trump with the fiscal policy enacted in the early 1980s by Ronald Reagan.
Reagan's Economic Recovery Tax Act of 1981 was pitched as the 'biggest tax cut in history' and lowered the top marginal tax rate by 23 per cent over three years.
Donald Trump plans to cut the corporate tax rate from 35 per cent to 15 per cent. He also plans to increase defence spending, as Reagan did – and to spend $1 trillion on infrastructure.
But Mr Carson points out that no major fiscal initiative of this scale has been attempted when the US jobless rate has been so low.
US unemployment averaged 4.9 per cent for 2016. By comparison, the jobless rate averaged 7.6 per cent in 1981 and increased to 9.6 per cent in 1983.
"If the fiscal initiatives spark a surge in growth (as they should), the demand for labor will far outweigh the available supply," Mr Carson said.
Many US companies are already reporting that they can't find an adequate supply of skilled labour, he said.
"Altogether, Trump’s fiscal initiatives could push wage (and general) inflation into running well above market expectations over the next two to five years," Mr Carson said.
If Trump's proposals are enacted in full, annual US wage growth could reach 4-5 per cent with core inflation in the 3-4 per cent range, Mr Carson said.
"In turn, these wage and inflation pressures could spark a faster pace of rate hikes by the Federal Reserve – not something that’s currently on the financial markets’ radar as a high risk," he said.