Trump’s boasts about the US econ­omy no longer ring hol­low

Don­ald Trump’s poli­cies are win­ning greater re­spect from an­a­lysts, though the caveats re­main, says Tim Wal­lace

The Sunday Telegraph - Money & Business - - Front page -

Jobs, jobs, jobs,” Don­ald Trump tweets out to the world. “This is all about the Make Amer­ica Great Again agenda,” he trills in praise of the stock mar­ket’s lat­est record high. “Six tril­lion dol­lars in value cre­ated!” The pres­i­dent is not shy about his prom­ises to the Amer­i­can peo­ple. His pop­u­lar­ity rat­ings are plum­met­ing and he is fight­ing back on the econ­omy.

Growth is strong. Stock mar­kets are soar­ing. Bill Clin­ton cam­paigned with the maxim “the econ­omy, stupid” and Trump has taken the mes­sage to heart.

Af­ter all, the other prob­lems tend to pale into in­signif­i­cance be­side un­em­ploy­ment. Look at the way the US pres­i­dent bel­lows each time the stock mar­ket hits a new high.

“The stock mar­ket has been creat­ing tremen­dous ben­e­fits for our coun­try in the form of not only record-set­ting stock prices, but present and fu­ture jobs, jobs, jobs,” he wrote last week. “Seven TRIL­LION dol­lars of value cre­ated since our big elec­tion win.”

It riles Trump’s many op­po­nents no end, gen­er­at­ing tens of thou­sands of of­ten mock­ing or de­ri­sive replies.

“What goes up must come down”, other doom-mon­gers warn, call­ing the record highs ev­i­dence of a bub­ble.

The mar­ket has been ris­ing since 2009, oth­ers note, ar­gu­ing this proves it is noth­ing to do with Trump.

The pres­i­dent may have been lucky in his in­her­i­tance, but that does not mean his poli­cies have had no ef­fect.

In the years im­me­di­ately af­ter the fi­nan­cial cri­sis mar­kets were driven by ul­tra-loose mone­tary pol­icy. But that sup­port is dry­ing up. The Fed is cut­ting back its stock of as­sets and in­ter­est rates are on the up.

So far mar­kets are also tak­ing this as good news. It looks like a re­turn to a be­nign nor­mal­ity – strong eco­nomic per­for­mance com­bined with low in­fla­tion means only gen­tle rises in in­ter­est rates and so sus­tained ris­ing stock mar­kets.

This is be­ing su­per­charged by Trump’s tax cuts, and his moves to cut old red tape and limit the in­tro­duc­tion of new reg­u­la­tions.

“The US passed its tax re­form pack­age – we were al­ways a bit on the fence as to whether or not it would pass – and the de­tails of it are pretty pos­i­tive,” says Jim Mccormick at Natwest Mar­kets, not­ing that the ben­e­fits to firms come right at the start of the pro­gramme, in­di­cat­ing an im­me­di­ate boost to prof­its.

An­a­lysts at BNP Paribas es­ti­mate the tax pack­age com­bined with ex­tra gov­ern­ment spend­ing in the US could add 0.7 per­cent­age points to GDP growth in 2018. It should keep boost­ing stocks as the re­forms were not com­pletely priced into mar­kets.

“The Bill it­self will pro­vide a boost to earn­ings, and if you layer on top of that another firm year of eco­nomic growth, you’ve got another 15pc earn­ings growth over 12 months,” says Mac­quarie econ­o­mist David Doyle.

With a sup­port­ive global eco­nomic en­vi­ron­ment there is no rea­son to think th­ese mar­ket gains can­not con­tinue, as firms make the most of Trump’s poli­cies.

Even as the Fed grad­u­ally tight­ens pol­icy, quan­ti­ta­tive eas­ing glob­ally is pump­ing more money into the mar­kets and credit con­di­tions are im­prov­ing, so the back­drop re­mains sup­port­ive for stocks.

“It is very dif­fi­cult from an an­a­lyt­i­cal per­spec­tive to be any­thing but pos­i­tive,” says Mccormick’s col­league An­drew Roberts. “And you’ve just taken off the big risk to the world which was China turn­ing the tap off. So you’ve taken away that risk. I think that is be­hind a lot of the spurt we’ve seen in eq­uity mar­kets.”

Bet­ter still, strong stock mar­kets cre­ate pos­i­tive sen­ti­ment among busi­nesses, in­vestors and share­hold­ing house­holds. That con­fi­dence en­cour­ages more in­vest­ment, more hir­ing and more con­sumer spend­ing, boost­ing shares in a pos­i­tive cy­cle.

“There are feed­back loops and causal­ity which run in both di­rec­tions. Ris­ing eq­uity mar­kets and the fall in the cost of cap­i­tal for firms is prob­a­bly a fac­tor which is con­tribut­ing to one el­e­ment of the im­prove­ment in eco­nomic ac­tiv­ity, namely a greater will­ing­ness of the cor­po­rate sec­tor to in­vest,” says Larry Hathe­way at as­set man­ager GAM In­vest­ments.

Roger Farmer, pro­fes­sor of eco­nomics at the Univer­sity of War­wick, at the Univer­sity of Cal­i­for­nia, Los An­ge­les, and re­search di­rec­tor at NIESR, has stud­ied more than 60 years’ worth of data on the stock mar­ket’s ef­fect on jobs and growth. This weight of ev­i­dence con­vinces him that op­ti­mism in­creases de­mand which di­rectly leads to higher em­ploy­ment.

US un­em­ploy­ment is al­ready at 4.1pc, the low­est level in 18 years, and he be­lieves the strong mar­ket will pull more peo­ple into work. “The mar­ket went up 25pc last year and if it keeps go­ing, which I ex­pect it will, I am ex­pect­ing at least 15-20pc gains from the mar­ket this year. Un­em­ploy­ment can­not go a huge amount lower but it can keep go­ing down,” he says, adding that peo­ple who are not even look­ing for work at the mo­ment will come into the mar­ket.

“Labour force par­tic­i­pa­tion is still very low com­pared to, say, UK stan­dards. As long as the mar­ket keeps go­ing up I think you can ex­pect the real econ­omy to keep grow­ing.”

He fears the midterm elec­tions could “de­rail the whole thing” if it re­sults in a strong show­ing for the Democrats and im­peach­ment pro­ceed­ings against the pres­i­dent.

“Short of that, I am very bullish on growth, I am very bullish on the stock mar­ket. Even though the mar­ket is high, it has still not reached the peaks it had in the dot­com boom around 2000. I don’t see any up­per bound to where it could po­ten­tially go,” he says.

“I think the sub­stance to Trump’s state­ments about fu­elling growth in the econ­omy through dereg­u­la­tion and through tax cuts – that is cer­tainly not go­ing to re­duce in­equal­ity, so if that is some­thing you are con­cerned about it is not a good thing. But if all you are con­cerned about is in­creas­ing em­ploy­ment, real growth and in­creases in the stock mar­ket, I don’t see that slow­ing in the near term.”

This leads him to con­clu­sions which are rarely voiced among econ­o­mists: Trump is right on at least one topic.

“There are de­trac­tors who, any­thing he says, sling mud at the man. Al­though there is much to sling mud at, I think here [he] is right,” says Farmer.

The pro­fes­sor ex­pects a mar­ket crash at some point, but sees the broad up­ward trend of prices across his­tory as ev­i­dence that this fear is no rea­son to stop in­vest­ing.

The cause of a crash could echo those of the Eight­ies and Nineties when in­fla­tion bub­bled up, forc­ing cen­tral bankers to hike rates rapidly, send­ing stocks tum­bling and slam­ming the brakes on eco­nomic growth.

So far the Fed has avoided that fate, putting the US and its mar­kets into a “goldilocks theme”, in Roberts’ words.

Hathe­way be­lieves mar­kets may be com­pla­cent, un­der­es­ti­mat­ing both the risk of in­fla­tion and the risk of the Fed re­spond­ing sharply to any rise in prices. Trump’s own tax plan con­tains another risk too – it is not just made up of give­aways.

“In the tax re­form leg­is­la­tion, there are in­cre­men­tal neg­a­tives for earn­ings growth into 2019 and be­yond”, says Doyle, fear­ing the cel­e­bra­tions might grind to a halt af­ter a 2018 of stronger earn­ings “as some of the de­duc­tions and loop­holes in cor­po­rate tax start to close”. He adds: “That could present an is­sue for the mar­kets.”

Trump’s other poli­cies too could end up haunt­ing the mar­kets. A key fear when the pres­i­dent was elected was that he would trash the global trade sys­tem and im­pose taxes and bar­ri­ers on in­ter­na­tional trans­ac­tions.

So far rel­a­tively lit­tle from those risks has emerged, but Nafta rene­go­ti­a­tions are com­ing up which could change that.

“Pro­tec­tion­ism could ar­ti­fi­cially bring in­fla­tion back,” says Natwest’s Roberts, as it takes the global mar­ket out of the equa­tion, forc­ing up prices ei­ther through bor­der taxes or more ex­pen­sive do­mes­tic pro­duc­tion.

It could cause in­ter­est rates to shoot up, crash­ing the mar­ket and mak­ing fi­nance more ex­pen­sive at a slower pace of growth. That would mean a drive for “jobs, jobs, jobs” could be scotched, creat­ing quite the op­po­site re­sult.

‘If all you are con­cerned about is in­creas­ing em­ploy­ment, growth and in­creases in the stock mar­ket, I don’t see that slow­ing’

US pres­i­dent Don­ald Trump has tweeted, be­low and right, claim­ing credit for ris­ing stock mar­kets and job creation

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