Trump’s Economy: The Best or The Bubble?

President Trump recently tweeted out his pleasure with the “great financial numbers” that were being announced “almost daily”. In usual fashion, he went on to boast that the numbers weren’t just great, they were the best ever: the economy has “never been better” and jobs were “at the best point in history”.

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Just how strong is the US economy? The old electoral adage “it’s the economy stupid” remains true, so leaving aside the President’s well-established penchant for wild hyperbole, the perceived performance of the economy should have an impact on both the 2018 and 2020 elections. A strong performance will go far to allowing Republicans to maintain control of the House and Senate, while a further two years of growth would challenge any Democrat candidate against the incumbent.

Let’s look at the second claim first: are “jobs” at the best point in history? Are they even at the best point in the past two Administrations? The answer is a clear “no” regardless of the statistic you choose to look at. Mr. Trump can boast of a low 3.9% civilian unemployment rate, but it is equivalent to Mr. Clinton’s achievement of a 3.8% in April 2000 or Mr. Johnson’s 3.4% from September 1968 to May 1969 or Mr. Eisenhower’s 2.5% in May 1953.

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It is also worth mentioning that the unemployment rate has historically improved over the course of Democratic administrations and worsened over the course of Republican administrations. The main exceptions to this 90-year trend are the Carter and Reagan years[1]. It is possible — if not likely — that Mr. Trump’s deficitary fiscal policy, which so far seem to benefit non-productive forces in the economy, will lead to increased speculation and a dangerous overheating which would lead to the formation of dangerous financial bubbles. Coupled with a spate of deregulation and possible exogenous shocks from trade disputes or a potential confrontation with Iran, it is difficult to view the next 2 years with complete equanimity.

Civilian employment is at a peak in absolute terms, but it is not at the best point in its history if we take into account the growth of the civilian population — that peak occurred in April 2000 during Bill Clinton’s second term. In order to match the Clinton maximum, Trump’s economy would need to add 10.6 million jobs which of course is impossible for any American President.

Not being the “best point in history” does not imply that the jobs situation is bad: on the contrary, non-farm job growth continues to be strong. The general trend has not diverted since March 2011, for 29 quarters of strong employment growth since the Obama recovery took hold, making this one of the longest periods of sustained employment growth in American history[2]. It is important to note that Mr. Trump has been President for only 6 of those 29 quarters[3]; additionally, the positive trend during those six quarters of the “Best President Ever” has not departed from the previous 27 quarters.

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What about manufacturing jobs? This was an area of focus during then candidate Trump’s campaign and one of his signature initiatives: bringing back American industrial jobs. The outlook is positive — without breaking any of Mr. Obama’s monthly record, the overall trend in manufacturing employment seems to be upwards. This remains modest praise: manufacturing employment remains 1.5 million jobs below the already anemic average of the 2000’s and 5 million jobs below that of the 1990’s. Manufacturing production continues to increase, but the charts do not take into account the effect of recently enacted tariffs against a variety of our trading partners, nor their retaliatory measures. An additional 2 or 3 quarters of data would be required to determine how new tariffs and trade restrictions will impact US manufacturing employment; though the consensus remains that industrial employment will suffer as a result.

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Job creation is one thing, but the quality of the jobs is a different matter. The Obama recovery was criticized, with some justification, as creating jobs that generated fewer hours and less wages than the ones lost during the 2008 Financial Crisis. That characterization remains accurate: the Trump Tax Cuts have not translated into higher pay for workers. Average hourly earnings for working Americans remain largely stagnant for the 2 quarters since enactment.

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Personal disposable income and consumer expenditures so far confirm that there is no middle class resurgence emerging. Though it may be early days given that the Trump Tax Cut was only signed into law in December of 2017, the early results appear disappointing[4]: there has been no noticeable change in the trend of wages, income or expenditures, all of which would go to materially sustaining American economic growth.

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None of the above is bad news: quite the contrary. Unemployment is low, the economy is still growing, income and consumption are increasing, consumer and business confidence are moving upwards — and while all of these trends existed prior to Mr. Trump’s inauguration, the fact that none Mr. Trump’s policy measures have (so far) had a negative impact on them plays in his favor. Politically, that should be enough: assuming the trends continue, Mr. Trump will benefit from a positive perception of “his economy” in the 2020 campaign, substantially increasing his chances of re-election, though it may not help GOP candidates in this year’s House and Senate races.

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Headwinds

Despite this lingering rosy glow, there are troublesome indicators that raise doubts as to the sustainability of the Trump economy. For starters, the American economy is the only major economy that is growing robustly — the rest of the world already seems to be slipping into recession.

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Unless we plan to trade a lot with Indonesia, that is going to inevitably impact the US economy as exports fall and cheaper imports increase. There does appear to be a softening of net exports, though whether this is due to Mr. Trump’s tariff policy or to a weakening world economy is not clear.

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There are causes for concern domestically as well. All three principal US stock exchanges have registered and sustained record highs since Mr. Trump’s election. Similarly, the Case-Shiller Home Price Index is at a maximum not seen since before the 2008 bubble burst. These are potential warning signs of “irrational exuberance” and speculative behavior, similar to what happened in the run-up to the Great Recession. Neither of these indicators seem justified by corporate fundamentals or middle class purchasing power: rather, they seem to be a response to stock buy-backs made possible by the reduction in corporate tax rates and money flowing in from speculative activities of wealthy Americans.

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This is not a repetition of the Great Recession. Household debt remains low, well below the almost 100% of GDP it reached during the speculative boom of the late 2000’s. Non-bank corporate debt, on the other hand, has already exceeded the levels seen in 2008, indicating that US firms are over-leveraged and vulnerable to interest rate increases.

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Speaking of which, the Fed certainly seems determined to continue raising rates and normalizing interest rate policy after years of free money. While perfectly logical, the implications for US companies is that their debt servicing costs will continue to rise, leading to a slowdown in investment and hiring. In response, both corporate AAA bonds and 10-year Treasuries have been creeping up.

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Not only does the Fed want to normalize their long-term interest rate policy, they are keeping a careful eye on prices. Inflation in terms of the CPI has been creeping up steadily with core inflation, which excludes the more volatile food and energy goods, shooting up from 1.7% last year to 2.4% in the first two quarters of 2018. Also worryingly, producer prices have been increasing even more rapidly than consumer prices, possibly due to market uncertainty regarding Mr. Trump’s trade policy and possibly due to early impacts of the wide variety of tariffs imposed by the Administration on almost all of our key trading partners. Although producers will not be able to pass on 100% of the cost to consumers, prices will inevitably go up, driving both inflation (and Fed concerns) as well as reducing consumption.

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The effects of such a supply-side shock are well-known: prices will increase, sales will fall, and companies will begin to drawdown inventories, eventually curtailing investment and hiring. All of this will lead to a reduction in GDP, one which may be large enough to send the US economy into recession[5]. If the downturn is large enough, overleveraged companies may begin to fail, exacerbating the problem.

Most disturbing are the long-term prospects for the economy. Mr. Trump is paying for his corporate bonanza by a wholesale plundering of the national treasury. Deficits are now projected to exceed 1 trillion dollars in 2019[6], a preposterous figure at a time that the economy is strong and growing. The federal government ran trillion dollar deficits during the depths of the Great Recession, from 2009 to 2012, when tax revenues plummeted and both social assistance programs and a large stimulus package were required to avoid a full-on repetition of the 1930’s catastrophe. There is no justification for such largesse today; any responsible Administration and Congress would be making every possible effort to reduce the deficit still further while the going was good[7].

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The Congressional Budget Office projects that a continuation of the Trump Tax Plan and budget deficits would leave the United States with a debt-to-GDP ratio greater than that of the Second World War within a decade. Such an irresponsible course of action would leave the country vulnerable to external shocks, including deliberate shocks perpetrated by potential adversaries, and unable to meet any contingency arising from conflict or natural disaster. The deliberate skew towards the wealthiest Americans also exacerbates the already dangerous inequality in wealth and income, which can only lead to further social unrest and radicalization. Mr. Trump and his Republican allies in Congress are knowingly and recklessly weakening the nation in order to fatten their wealthy and corporate backers.

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Mr. Trump has benefited from the solid foundation of growth laid by Mr. Obama, and his main fiscal and economic policies have served to spur short-term growth with an injection of cash to corporations and wealthy investors. The medium-term outlook is more uncertain as the President’s posture on tariffs is increasing uncertainty in an already anemic world economy, disrupting supply chains and provoking price increases in a wide variety of inputs used by US manufacturers. Additionally, the hot money injected by the Trump Tax Cut is likely to cause overheating in the economy which the Fed will respond to by increasing interest rates. This will likely lead to a downturn and possibly a recession in the US economy. The long-term prospects are far direr: a weak federal government with an impossible debt burden exposed to international and domestic shocks and unable to respond to either effectually, as well as a poorer, angry more radicalized populace.

Notes

[1] It is worthwhile noting that the Carter Administration was following the trend until the twin exogenous shocks of the Iranian Revolution and the Second OPEC Crisis threw the American economy into a severe recession. The Carter Administration efforts to conserve energy and shift production sources took time to implement, coming to fruition when Mr. Reagan was already in office. Coupled with a modest tax cut and a large fiscal stimulus package, Mr. Reagan engineered a Keynesian recovering that lasted into 1990.

[2] Considered as a period in which every monthly job report has been positive. The employment booms during the 1980’s and 1990’s were both comparable, but each had at least one month of net employment loss.

[3] Data stops in June 2018

[4] Only assuming you are not part of the top 10% of wealthiest Americans, to whom the tax cuts were directed. In that sense, it has not been a failure at all.

[5] Defined as two consecutive quarters of negative GDP

[6] According to Nick Timiraos, “U.S. deficit now projected to top $1 trillion starting next year,” The Wall Street Journal, 18 July 2018

[7] I have demonstrated previously that Republican Administrations and Republican Congresses have not been fiscally responsible since Eisenhower. See: Fernando Betancor, “Myth 1: Republicans Are the Party of Fiscal Responsibility”, Common Sense, 20 August 2014

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