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Trump has set economic growth on fire. Here is how he did it
By: BJ Date: September 10, 2018, 6:47 am
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Trump has set economic growth on fire.
Here is how he did it
President Donald Trump presides over an administration that has
seen an enormous level of controversy that could overshadow a
burgeoning economy.
He has delivered on promises to cut taxes and regulations and
promote activity through more aggressive government spending.
Critics believe that it won't last because the fiscal stimulus
is aimed only at near-term growth.
The results, though, have been impressive: a surge in company
profits and near-record levels of optimism from consumers and
businesses.
Trump's economy: Here’s where he gets credit, and what could go
wrong
President Donald Trump is more than 19 months into an
administration engulfed in so much controversy that it may
overshadow a tremendous achievement, namely an economic boom
uniquely his.
During his time in office, the economy has achieved feats most
experts thought impossible. GDP is growing at a 3 percent-plus
rate. The unemployment rate is near a 50-year low. Meanwhile,
the stock market has jumped 27 percent amid a surge in corporate
profits.
Friday brought another round of good news: Nonfarm payrolls rose
by a better-than-expected 201,000 and wages, the last missing
piece of the economic recovery, increased by 2.9 percent year
over year to the highest level since April 2009. That made it
the best gain since the recession ended in June 2009.
His critics, a group that includes a legion of Wall Street
economists, most Democrats and even some in his own Republican
Party, don't believe it will last. They figure the current boom
will begin petering out as soon as mid-2019 and possibly end in
recession in 2020.
But even they acknowledge that the current numbers are a
uniquely Trumpian achievement and not owed to policies already
set in motion when he took office.
"I still believe the big story this year is an economic boom
that most folks thought impossible," Larry Kudlow, director of
the National Economic Council and a chief advisor to Trump, said
in a recent interview with CNBC.com. "I understand that he's
been in for a year and a half, but when you look at those
numbers, this is not going away."
Indeed, the economy does seem to be on fire, and it's fairly
easy to draw a straight line from Trump's policies to the
current trends.
Trump's economic achievements
Business confidence is soaring, in part thanks to a softer
regulatory environment. Consumer sentiment by one measure is at
its highest level in 18 years. Corporate profits, owed in good
part to last year's tax cuts, are coming close to setting
records.
Each of those accomplishments can be tied either directly to new
policies or at least indirectly through a brimming sense of hope
from businesses that the White House is back on their side.
"When you look at those confidence indexes, they're telling you
something," Kudlow said. "His attitude is, we're not punishing
business, we're not punishing success, we want to make things
easier to do business and to hire, and I think it's had a very
positive effect and a very palpable effect."
GDP most recently gained 4.2 percent in the second quarter, the
best performance in nearly four years.
At the same time, the unemployment rate is 3.9 percent, just
one-tenth of a percentage point above the lowest level since
1969.
But there are some more telling figures about just how much
progress has been made under Trump.
At a time when most economists had been using the term "full
employment" to describe the economy, 3.9 million more Americans
have joined the ranks of the working during the Trump term.
During the same period under former President Barack Obama,
employment had fallen by 2.6 million. The economy in total,
while still not in breakout mode, has grown by $1.4 trillion
through the second quarter under Trump; the same time period for
Obama saw a gain of just $481 billion, or a third of Trump's
total.
Businesses are investing, consumers are spending and innovation
is on the rise as well.
President Donald Trump delivers remarks before signing an
executive order on strengthening retirement security in America
at Harris Conference Center in Charlotte, NC, August 31, 2018.
President Donald Trump delivers remarks before signing an
executive order on strengthening retirement security in America
at Harris Conference Center in Charlotte, NC, August 31, 2018.
Trump pledged that he would pare down regulations that were
choking business activity. While the actual moves toward
deregulation haven't been quite as ambitious as planned, the
approach has won him converts in the business community.
The most recent reading from the National Federation of
Independent Business was the second highest in history dating
back 45 years. Small business owners reported aggressive hiring
plans, the only obstacle to which has been a dearth of labor
supply. The end of June saw 6.7 million job openings and just
6.6 million Americans classified as unemployed, an unprecedented
imbalance.
"Expansion continues to be a priority for small businesses who
show no signs of slowing as they anticipate more sales and
better business conditions." NFIB President and CEO Juanita
Duggan said in a statement.
How he did it
Trump's economic program was very simple: an attack on taxes and
regulations with an extra dose of spending on infrastructure and
the military that would create a supply shock to a moribund
economy.
On the tax side, the White House pushed through a massive $1.5
trillion reform plan that sliced the highest-in-the-world
corporate tax from 35 percent to 21 percent and lowered rates
for millions of taxpayers, though the cuts for individuals will
expire in 2025.
On deregulation, Trump ordered that rules be pared back or
eliminated across the board. During his time in office, Congress
has cut back on the Dodd-Frank banking reforms, particularly in
areas affecting regional and community institutions, rolled back
a multitude of environmental protections that he said were
killing jobs and took a hatchet to dozens of other rules. (The
left-leaning Brookings Institution think tank has a rolling
deregulation tracker that can be viewed here.)
During the first year of his administration, "significant
regulatory activity" had declined 74 percent from where it was
in the same period of the Obama administration, according to
data collected by Bridget Dooling, research professor at GW's
Regulatory Studies Center.
The Dodd-Frank rollbacks have been particularly helpful to
community banks, whose share prices collectively are up more
than 25 percent over the past year. Small-cap stocks in general
have strongly outperformed the broader market, gaining 23
percent over the past 12 months at a time when the S&P 500 is up
17 percent.
The Federal Register, where business rules are stored and thus
serves as a proxy for regulatory activity, was 19.2 percent
smaller from Inauguration Day until Aug. 16 under Trump than
during the same period for Obama.
"You can think of that as turning off the spigot of new
regulations," Dooling said in an interview. She said more
aggressive movement appears to be on the way.
Dooling said recent regulatory changes from the Environmental
Protection Agency and the departments of Education and Labor
will advance deregulation in an even "more meaningful way."
In addition to expected deregulation benefits, there's also
anticipation that the true benefits of tax cuts have yet to kick
in. Mick Mulvaney, head of the Office of Management and Budget,
recently told CNBC that he attributes the bulk of new economic
growth to deregulation rather than the tax cuts, whose benefits
he expects to come later.
"It's still too early to tell. We haven't seen any of the
multipliers yet from tax reform," said Jacob Oubina, senior U.S.
economist at RBC Capital Markets. "We have enough in terms of
ammunition to put in 3 percent growth for the rest of this year
and even all of 2019, but we haven't seen sort of this spike in
activity yet."
There's been another interesting trend that is peculiar to the
Trump economy: a drifting of benefits from urban centers to
nonmetropolitan areas, which are seeing their first collective
population growth since 2010.
Trump's tax cuts "should deliver greater tax relief to rural
areas where there is a higher rate of small business owners who
will benefit from the favorable pass-through tax rates," Joseph
Song, U.S. economist at Bank of America Merrill Lynch, said in a
recent note to clients.
Skeptics doubt it will last
His critics don't believe it will last. They figure the current
boom will begin petering out as soon as mid-2019 and possibly
end in recession in 2020.
"This is temporary. In fact it's raising the odds of recession
on the other side," said Mark Zandi, chief economist at Moody's
Analytics. "The economy is now more cyclical because of the
stimulus. You're doing a lot of near-term growth, but you're
setting up for a tough time on the other side of it. That's why
most economists think we have a recession in 2020, because of
these policies."
There is plenty to worry about: A ballooning debt that will only
get worse if Trump's growth predictions don't materialize, the
increasing likelihood of a trade war that sparks inflation and
punishes U.S. companies that depend on exports, and a suddenly
slowing real estate market that could be pointing to larger
issues at the heart of the economy.
Indeed, while Trump has preached fiscal discipline, he has not
practiced it. The U.S. economy is carrying a $45 trillion debt
load that continues to grow under Trump. Government debt has
swollen by $1.46 trillion in Trump's 19 months, an increase of
7.3 percent, to $21.4 trillion. The public owes $15.7 trillion
of that debt, an increase of 9 percent.
Government debt since 2009
There also are some pockets of the economy that remain mired in
slowness, most notably wage gains. Average hourly earnings have
risen just 4.1 percent since January 2017 when Trump took
office, barely keeping pace with inflation. (Still, during the
same period wages rose just 3 percent under Obama.)
Then there's the Federal Reserve, which cut rates and flooded
the financial system with cash during the Obama years. Now it is
reversing course and tightening, or raising rates.
"The short answer is the honest answer: Nobody knows," Joe
LaVorgna, chief economist for the Americas at Natixis, said in
assessing the duration of the Trump bump. "If we generate 3.5
percent this year and generate 3.5 percent next year, that could
happen provided the Fed doesn't kill it. Then you're going to
say it looks like some of it was Trump. It has to be."
With midterm elections fast approaching, Trump's economic record
will be front and center. The strong performance could bolster
Republicans' hopes as the GOP tries to hold onto control of both
the House and the Senate.
So far, though, the experts have gotten it wrong about Trump.
LaVorgna said the final verdict in assessing the Trump
performance is yet to come.
When Obama took criticism for the performance during his years,
he often blamed obstructionist Republicans.
If the economy falters now, Trump will have no one to blame but
himself.
"It's very hard to disentangle all these effects," he said. "If
we do get 3 percent growth, which we haven't had since 2005, you
have to give credit where it's due. Whether it lasts, who
knows?"
Jeff Cox
Finance Editor
(HTM) https://www.cnbc.com/2018/09/07/how-trump-has-set-economic-growth-on-fire.html
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