Health warning
The ‘Trump bump’ could be undone on several fronts, US experts have warned
Even by his standards, Donald Trump was in ebullient form when he addressed loyalists in Pensacola, Florida. In front of a roaring crowd of around 12,000, he hailed the performance of the US economy on his watch. “Since the election – and they’re not going to argue with this – we’ve created 2.2 million new jobs, factories are coming back to our country,” Trump said.
“You know, we have factories pouring back into our country. Did you ever think you would hear that? I used to tell you, that’s going to happen. You see, now there’s consequences when companies close up their factories, move to another country, make a product and sell it right through – they have consequences now.”
It would be churlish to deny that the US economy has been performing well since Trump was elected, although the conventional wisdom among economists is that the upturn began long before he entered the Oval Office.
“I am positive about the United States,” says John Quelch, dean of Miami Business School. “I think it is a pretty rosy picture. I think the market has already factored in potential risks.” The prospect of sweeping corporate tax cuts, which Trump signed off just before Christmas, has encouraged business confidence and unemployment continues to fall, hovering above 4pc.
There are signs of labour shortages, which have seen wages at the bottom being driven up. Even fast food restaurants are having to pay rather more than the minimum wage to get the staff that they need.
The administration has been praised by many, including Prof Quelch, for cutting back on a raft of regulations that were introduced by the Obama administration.
Supporters say this has boosted what was already a healthy economy over the past few months.
Many experts agree. Kjersti Haugland, chief economist at DNB, a Norwegian bank with $325bn (£242bn) in assets, thinks the US is on track for a prosperous 2018 and that Trump’s optimism is not misplaced.
“We do think he is right, in the sense that the tax cuts will lift the US economy by boosting investment.” But there is a sense that the president is overselling the Trump economic miracle. “I think this will have only a little impact on the US economy, lifting it by about 0.2pc, not the 1pc he talks about,” she adds.
Business confidence in the US reflects the continuing recovery after the 2007-08 global financial crisis and, as far as Haugland is concerned, America is set fair for 2018.
However, even her optimism is tempered by fears that darker times could be around the corner.
Credit is currently readily available, she says. The concern is that debt is also building up and at some point the brakes could be slammed on.
“I think there is a danger of financial conditions freezing and credit, which has been easy to get, becoming extremely tight. That could produce problems for the US economy as companies find it harder to roll over debt or service it. That could bring the economic upturn to a halt.”
She is not the only expert to sound a note of caution, even if the numbers do look rather good at the moment.
James Mccann, senior global economist with Aberdeen Standard Investments, questions the timing of the tax cuts and fears, long term, the brakes may have to be put on.
“I think the macro outlook is pretty favourable in the United States, even discounting the prospect of a fiscal stimulus. We are moving into a virtuous stage of the business cycle.
“We clearly have had fiscal easing and there is a high likelihood that tax reform will go through,” he says.
“But the tax cuts are completely unnecessary. It is a strange stage of the cycle to be putting in a fiscal stimulus. You have to make a heroic assumption that tax cuts will be revenue generating or even self-financing.
“Tax cuts do help the corporate sector and people with higher incomes, but they may have less propensity to consume,” he adds.
The new threat is inflation and, if the economy starts to overheat, there may be a need to cool things down. “There are always risks when you move policy very quickly, especially at a time when debt is high.” Mihir Desai, a professor at Harvard Business School, is among those who have concerns about the tax plan which, despite the prospect of the repatriation of billions of dollars, he regards as fiscally irresponsible.
“It was something that started as a reasonable piece of reform and was degraded into a poorly designed tax Bill,” he says.
He fears that the fiscal deficit will rise higher than the $1.4trillion envisaged in the Senate version of the Bill.
Even some Republicans were uneasy at the size of the tax cuts and the long-term damage that could be done to the economy if the deficit is allowed to balloon.
Bob Corker, a Tennessee Senator, even voted against the tax Bill because of the threat he felt it posed to the national debt, before finally coming round. He and Senator James Lankford from Tennessee wanted a provision put into the Bill which would see corporation tax rise again if the cuts fail to produce the economic growth needed to make them viable.
Hard-line conservatives are opposed to what is known as a fiscal trigger, which would reverse some of the tax cuts. Tim Phillips, the president of the Koch Brothers-funded advocacy group, Americans for Prosperity, described it as a bad idea. “The last thing you’d want to do if there were some kind of economic downturn would be to raise taxes,” he told Atlantic magazine. “It also leads to uncertainty for businesses, because you don’t know what your tax rates are going to be from year to year.”
One way of balancing the books will be spending cuts, with federal healthcare and anti-poverty programmes on the chopping block.
That is the road favoured by Paul Ryan, the Republican speaker in the House of Representatives.
“We’re going to have to get back next year at entitlement reform, which is how you tackle the debt and the deficit,” he said. But slashing Medicare – the subsidised insurance programme used by 44m older Americans – carries huge political risks. At a stroke the Republicans would be in danger of alienating 15pc of the population.
There is already some unease at the party’s prospects in the midterm elections, and upsetting a huge tranche of voters may not necessarily be the wisest course of action.
There are other clouds looming over what is a reasonably bright outlook.
Some experts have voiced fears that the root-and-branch sweeping away of regulations in the financial sector could be a step too far, potentially paving the way for a repeat of the financial crash of 2007-08.
The administration’s immigration curbs are also beginning to bite on various sectors of the economy, from hotels and catering at one end, to the computer industry at the other.
Tighter restrictions imposed on L1-visas for workers being transferred by their employers to the US may make some companies more reluctant to do business in the country. Trump’s “buy American, hire American” policy could also backfire as he turns his focus to trade. A theme in his speeches is how the US is being taken to the cleaners by its trading partners. It may win him applause at rallies but, many feel, shows ignorance of how the global economy works.
“He is obsessed by balanced trade and the idea that trade can be balanced on a bilateral basis is unbelievably stupid,” says Andrew Rose, BT Rocca Professor of International Business at UC Berkeley. Fears that Trump could provoke a trade war were heightened when the US imposed an eye-watering 300pc tariff on Bombardier aircraft.
In doing so, Trump managed to antagonise two of his key allies, Justin Trudeau of Canada and Theresa May.
But Rose plays down the prospect of the trade feud worsening, or widening to other countries. “The fear of protectionism has not been realised because of the confusion and incompetence of this administration.”
In reality, he adds, trying to second-guess what the Trump administration will do is pointless. “Making any prediction about what this administration will do is really difficult, it all depends on what catches his eye when he watches television.”
‘The tax cuts are completely unnecessary. It is a strange stage of the cycle to be putting in a fiscal stimulus’