Econ­omy that Trump in­her­its: Durable but slug­gish

Daily Local News (West Chester, PA) - - BUSINESS - By Paul Wise­man and Christo­pher S. Ru­gaber AP Eco­nom­ics Writ­ers

Don­ald Trump in­her­its a much stur­dier econ­omy than the one Barack Obama car­ried into his sec­ond term four years ago. Back then, the scars of the Great Re­ces­sion were still fresh. Job­less­ness was near 8 per­cent. Pay was flat. Europe faced a grave debt cri­sis that threat­ened to spread across the At­lantic.

Now? The job mar­ket, with steady hir­ing and just 4.9 per­cent un­em­ploy­ment, has proved durable. Pay is fi­nally ac­cel­er­at­ing. Auto sales are near a record pace. Hous­ing is stronger. Europe’s fi­nan­cial plight has sta­bi­lized.

Yet the econ­omy’s long-stand­ing shift to­ward work­ers with col­lege de­grees left peo­ple with­out them stuck with dim­mer job op­por­tu­ni­ties and stag­nant wages — a trend for which Trump blamed trade deals that he said led man­u­fac­tur­ers to move over­seas. The Amer­i­cans who elected Trump are long­ing not just for change but for a re­ver­sal of the Obama era — one that will ig­nite growth, slash taxes, re­store lost fac­tory jobs and curb most fed­eral reg­u­la­tions.

Prob­lem is, the econ­omy’s most vex­ing prob­lems — from an ag­ing work­force to list­less pro­duc­tiv­ity to weak cor­po­rate spend­ing — defy quick fixes. Trump has pledged an eco­nomic re­nais­sance yet has avoided the broad pol­icy pre­scrip­tions widely seen as nec­es­sary for man­ag­ing a govern­ment.

Well be­fore the elec­tion, Trump’s sup­port­ers came to dis­trust govern­ment data that pointed to a re­cov­ery and to ques­tion the in­ter­ven­tions by the Fed­eral Re­serve to sus­tain growth. But given his ex­trav­a­gant eco­nomic prom­ises, the hote­lier, real es­tate de­vel­oper and TV celebrity

faces an up­hill chal­lenge.

“His lack of gov­ern­ing ex­pe­ri­ence, po­ten­tial dif­fi­cul­ties build­ing re­la­tion­ships with con­gres­sional lead­ers and in­con­sis­tent pol­icy pro­nounce­ments dur­ing the race make it hard to pre­dict his pol­icy ini­tia­tives or his ef­fec­tive­ness in driv­ing them through Congress,” Mark Hae­fele and Thomas McLough­lin of UBS wrote in a note to in­vestors.

On the pos­i­tive side, econ­o­mists say they see no signs of the fi­nan­cial ex­cesses or stalled con­sumer spend­ing that of­ten tip economies into re­ces­sion. Yet with in­ter­est rates still near record lows, the Fed has lit­tle am­mu­ni­tion left to help should the econ­omy weaken.

If things sour, Trump’s “pol­icy op­tions will be con­strained, per­haps his­tor­i­cally so,” said Pa­trick O’Keefe, di­rec­tor of eco­nomic re­search at the con­sult­ing firm CohnReznick.

Since the re­ces­sion of­fi­cially ended in June 2009, growth has av­er­aged a sub­par 2.2 per­cent a year. Yet at 89 months old, this is the fourth-long­est of 33 re­cov­er­ies from re­ces­sion dat­ing to 1858, ac­cord­ing to the Na­tional Bu­reau of Eco­nomic Re­search.

The Fed has sig­naled it’s con­fi­dent enough in the econ­omy to re­sume rais­ing short-term rates at its next meet­ing in mid-De­cem­ber. Late last year, the Fed raised its bench­mark short-term rate from a record low after hav­ing kept it there for seven years to help re­ju­ve­nate the econ­omy after the re­ces­sion. It had been ex­pected to fol­low this year with sev­eral more rate in­creases.

But trou­ble over­seas — es­pe­cially panic over a sharp slow­down in China, the world’s No. 2 econ­omy — and a slump in U.S. growth put the cen­tral bank on hold. The econ­omy has also been slowed by a strong dol­lar, which has made U.S. goods costlier over­seas. Tepid busi­ness investment, partly re­sult­ing from cuts in the en­ergy in­dus­try in re­sponse to low oil prices, has hurt, too.

In the mean­time, by his­tor­i­cal stan­dards, bor­row­ing rates re­main ex­traor­di­nar­ily low. The av­er­age rate on a 30-year fixed mort­gage was 3.57 per­cent this week, not much above the record low of 3.31 per­cent.

Many econ­o­mists think su­per-low rates will re­main in place for years, which is why they fret that there will be lit­tle room for the Fed to cut rates fur­ther to de­liver stim­u­lus in case of a re­ces­sion. J.P. Mor­gan pegs the prob­a­bil­ity of a re­ces­sion within the next three years at 66 per­cent.

“The tools that in the past have been used to com­bat a re­ces­sion or try to en­hance a de­cel­er­at­ing econ­omy are al­ready ex­hausted,” O’Keefe says.

It’s pos­si­ble, of course, that Trump and Congress will agree on some ini­tia­tive that might help en­er­gize the econ­omy — on in­fra­struc­ture spend­ing, for ex­am­ple, or tax re­form.

For years, the econ­omy has been hob­bled by an older and slower-grow­ing work­force and by lack­lus­ter gains in the pro­duc­tiv­ity of its work­ers.

The per­cent­age of adults who ei­ther have a job or are look­ing for one has dropped from 66 per­cent when the Great Re­ces­sion hit in De­cem­ber 2007 to 62.8 per­cent. Re­tire­ments by the vast gen­er­a­tion of baby boomers are part of the rea­son. But an­other fac­tor is that many work­ing-age Amer­i­cans have been forced to the side­lines as blue-col­lar fac­tory jobs have van­ished. Many other peo­ple have left the work­force to go on dis­abil­ity.

Pro­duc­tiv­ity — out­put per hour of work — fell for three straight quar­ters (for the first time since 1979) be­fore re­bound­ing in the July-Septem­ber quar­ter. Ris­ing pro­duc­tiv­ity is vi­tal to rais­ing Amer­i­cans’ liv­ing stan­dards be­cause it al­lows busi­nesses to pay em­ploy­ees more with­out hav­ing to raise prices.

The pro­duc­tiv­ity drought is a puzzle to econ­o­mists. Most had ex­pected tech­nol­ogy to speed ef­fi­ciency. One ex­pla­na­tion is that the heart of the econ­omy has been shift­ing from man­u­fac­tur­ing, where au­toma­tion has pro­duced big pro­duc­tiv­ity gains — to ser­vices, where it hasn’t.

An­other view is that Amer­ica’s de­te­ri­o­rat­ing roads, ports and bridges are slow­ing ship­ping and com­mut­ing times and mak­ing the econ­omy less ef­fi­cient.

“The eco­nomic cost is huge to hav­ing all those peo­ple sit­ting in cars and air­plane tar­macs do­ing noth­ing,” says Ethan Har­ris, chief global econ­o­mist at Bank of Amer­ica Mer­rill Lynch.

For now, as­sum­ing that hir­ing re­mains solid with un­em­ploy­ment around his­tor­i­cally nor­mal lev­els, even tepid eco­nomic growth should man­age to keep rais­ing worker pay over the next cou­ple of years, Har­ris says.

Just don’t ex­pect the econ­omy to strengthen. Growth won’t likely rise much from its cur­rent list­less pace of 1.5 per­cent to 2 per­cent a year, Har­ris says.

“There will still be a sense of dis­ap­point­ment in the econ­omy for the av­er­age per­son, be­cause growth isn’t go­ing to get any bet­ter,” he says. “We’ve got to ac­cept that 2 per­cent is good growth, not bad growth. That’s the norm now.”


Job seek­ers at­tend a New York Depart­ment of City­wide Ad­min­is­tra­tive Ser­vices job fair in New York. When he is sworn into of­fice, Pres­i­den­t­elect Don­ald Trump will in­herit a much stur­dier econ­omy than the one Barack Obama took into his sec­ond term four years ago.

Don­ald Trump

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