Surg­ing US econ­omy down to ‘Trump ef­fect’ – or just good luck

Given that Trump has not im­ple­mented promised poli­cies, it is clear he in­her­ited a strength­en­ing econ­omy

The Irish Times - Weekend Review - - NEWS REVIEW -

Usu­ally a surg­ing US econ­omy is re­flected in strong ap­proval rat­ings for the pres­i­dent. So why are Pres­i­dent Don­ald Trump’s poll rat­ings so low, de­spite strong growth? Or is it that were it not for the econ­omy, Trump’s sup­port would col­lapse yet fur­ther?

The Trump ad­min­is­tra­tion came into of­fice as the econ­omy started to move into a higher gear fol­low­ing a pro­longed pe­riod of growth. The latest fig­ures show that GDP was grow­ing at 3 per cent in the third quar­ter and es­ti­mates are that the fourth quar­ter data could be stronger still, with some es­ti­mates of an­nu­alised growth of 4 per cent plus. The unem­ploy­ment rate, mean­while has dropped to just over 4 per cent, close to what would be judged to be full em­ploy­ment. The US looks set to be the top per­former among the world’s ma­jor economies this year.

Given that Trump has not im­ple­mented his promised eco­nomic poli­cies, most of this would prob­a­bly have hap­pened no mat­ter who won the last elec­tion. It is now clear that Trump in­her­ited a strength­en­ing econ­omy.

How­ever the pres­i­dent’s sup­port­ers ar­gue that the “Trump ef­fect” has had a key im­pact – help­ing to push the stock mar­ket to record highs and un­der­pin­ning eco­nomic con­fi­dence. The sus­tained growth “proves that Pres­i­dent Trump’s bold agenda is steadily over­com­ing the dis­mal econ­omy in­her­ited from the pre­vi­ous ad­min­is­tra­tion”, ac­cord­ing to com­merce sec­re­tary Wil­bur Ross.

Ei­ther way, whether it is good luck or good judg­ment, the in­cum­bent nor­mally gets the po­lit­i­cal credit for a strong econ­omy. Do­ing so is now vi­tal for the Trump ad­min­is­tra­tion, par­tic­u­larly as he tries to turn pol­icy prom­ises into ac­tion, mov­ing into his sec­ond year in of­fice.

This week the House Repub­li­cans pub­lished a plan for tax cuts, which the Trump ad­min­is­tra­tion wants to see passed into law this month. The Trump rhetoric is that this could put the econ­omy into a “higher gear”, par­tic­u­larly with cor­po­ra­tion prof­its tax due to fall to 20 per cent, from 35 per cent now. How­ever, tough talk­ing is now ahead to push the plan through Congress, with many ar­gu­ing that, de­spite late changes, the rich still stand to be by far the big­gest winners from the plan.

Trade pol­icy

Mean­while, the shape of Trump’s trade pol­icy re­mains un­cer­tain, with par­tic­u­lar de­bate about his in­ten­tions to­wards Nafta, the trade agree­ment be­tween the US, Mex­ico and Canada. Does the pres­i­dent want to re­form this deal or aban­don it? No one seems sure, per­haps – given the mixed sig­nals em­a­nat­ing from the White House – not even the pres­i­dent him­self.

The surge in the mar­kets and the econ­omy is in marked con­trast to the pre­vail­ing mood on elec­tion night as it be­came clear Trump was go­ing to be the next pres­i­dent. Then there was talk of a fall­ing US dol­lar and a pe­riod of eco­nomic and mar­ket nerves, spurred by the pres­i­dent’s fight­ing talk on trade pol­icy and his un­cer­tain bud­get pol­icy.

In the event, in­vestors took a more re­laxed view and, en­cour­aged by his pro-busi­ness rhetoric and prom­ises of lower taxes and less reg­u­la­tion, stock­mar­kets surged for­ward. The “Trump trade” has seen the Dow Jones In­dex gain al­most 30 per cent over the past year.

In the midst of all the ex­tra­or­di­nary tur­bu­lence of his pres­i­dency, Trump needs the econ­omy to stay on track. Growth of 3 per cent plus a year is needed to help pay for tax cuts promised in this week’s plan. Yet this is far from guar­an­teed – and what Trump will do on trade pol­icy re­mains un­clear. Some be­lieve he wants to un­der­mine the cur­rent gov­er­nance of world trade over­seen by the World Trade Organisation, as the ad­min­is­tra­tion pur­sues the eco­nom­i­cally il­lit­er­ate pol­icy of elim­i­nat­ing trade deficits with key part­ners. Oth­ers be­lieve he sim­ply would not take the risk.

Great­est dan­gers

But per­haps the great­est dan­gers are the ob­vi­ous ones. The first is of Trump’s pres­i­dency im­ping­ing on eco­nomic con­fi­dence, whether due to the grow­ing in­quiries into Rus­sian links, ten­sions with North Korea or some­thing as yet un­fore­seen. The pres­i­dent’s volatil­ity is it­self a ma­jor eco­nomic risk fac­tor.

The sec­ond ob­vi­ous risk is more mun­dane – the eco­nomic cy­cle. The US econ­omy has now been grow­ing – al­beit some­what slowly for some pe­ri­ods – for more than eight years, much longer than the nor- mal cy­cle. With in­fla­tion pick­ing up, the US Fed­eral Re­serve Board, its cen­tral bank, is start­ing to push up in­ter­est rates and is likely to con­tinue to do so. If growth hits the skids, stock mar­kets look vul­ner­a­ble at cur­rent val­u­a­tions and the feel- good fac­tor could quickly dis­ap­pear.

Push growth for­ward

Trump has ar­gued that his tax plan can push growth for­ward again. Econ­o­mist Arthur Laffer, a Trump ad­viser dur­ing the elec­tion cam­paign, ar­gued in a re­cent Fi­nan­cial Times oped that sus­tained growth of 3 to 4 per cent – up from 1.6 per cent in Bar­rack Obama’s last year in of­fice – “is not just pos­si­ble, but prob­a­ble”.

Many econ­o­mists are highly scep­ti­cal and warn that the tax cuts num­bers do not add up – and that the plan is purely de­signed to line the pock­ets of the rich and cor­po­rate Amer­ica. Time will tell if it even passes into law. But hav­ing ben­e­fited from a strongly grow­ing econ­omy in his first year, Trump is now dou­bling his bets on a buoy­ant out­look. The risk for him is that strong growth has come too early in the elec­toral cy­cle and will in­evitably wane. The strat­egy, as out­lined, is to im­ple­ment pol­icy changes which will give a per­ma­nent lift to the growth out­look.

Never one to take the con­ven­tional route, Trump says his poli­cies can de­liver an eco­nomic trans­for­ma­tion. His­tory would sug­gest, how­ever, that like pres­i­dents be­fore him, he will re­main a pris­oner of the eco­nomic cy­cle.

In the midst of all the tur­bu­lence of his pres­i­dency, Trump needs the econ­omy to stay on track. Growth of 3 per cent plus a year is needed to help pay for tax cuts promised in this week’s plan

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