14 March 2019
Donald Trump’s big mistake
Is the US economy fading?
By Frank O’Nomics
In politics timing is everything. Just when those who want a political change in the US were beginning to despair over a lack of credible opposition, signs emerge that the economic tide could be turning against the President. One should never extrapolate from one set of economic data, given margins of error and volatility, but last Friday’s US employment data showed a distinct loss of momentum for the US economy. A slowdown may be barely perceptible currently, but there is a real prospect of one taking hold by the time of next year’s US Presidential election. The accepted wisdom in politics is to try to time an economic stimulus so that the economy is in an upswing by the time of voting, yet the Trump administration seem to have committed the cardinal sin of having, in terms of a track runner, “gone too soon” with last year’s huge fiscal stimulus. The consequence could be, by late 2020, a disconsolate electorate and loss of office.
Last Friday’s data, on the face of it, looked relatively unremarkable. Payrolls had increased by 20,000 and the unemployment rate dipped back to 3.8% having blipped up to 4.0% in January, when bad weather and the government shutdown over the debt ceiling impasse were causing problems. However, the data was nothing like as good as had been expected, with 150,000 more jobs generally forecast. Further, when looked at over a longer period, the level of unemployment is at best flat lining, with the rate at 3.8% for almost a year; on a 3-month moving average, that rate is now turning up slightly. If this were to be confirmed it would flag a pretty big warning sign to the US government, given that every recession since the Second World War has been preceded by a trough in the unemployment rate. The average lag between that trough and the start of a recession is 11 months – pretty well the worst scenario from an electoral perspective.
Time, then, for another economic stimulus? That will not be so easy. The boost from tax cuts and government spending announced last year seems to have lasted for a very limited time and the scope to do more, with the deficit rising from 2.4% of GDP in 2015 to an expected 4.2% this year, would appear to be limited – recent issues with the debt ceiling illustrate a limited room for maneouvre. Already the administration is acknowledging that a balanced budget is over 15 years away and is asking Congress to sanction cuts in domestic spending (including £550bn of cuts in Medicare over the next 10 years). External factors are unlikely to provide any help – in fact, quite the opposite. The slowdown in China and Europe will lead to lower demand for US exports, even without any escalation of the trade war with China. There are already signs of a slowdown in manufacturing (where just 4,000 jobs were added last month compared with an average of 22,000 last year) and, while manufacturing may be of a declining relevance for overall GDP, the GDP forecast for Q1 is just 0.5%, with many now seeing lower growth for next year. While the White House forecast 2020 growth at 3.1%, the IMF forecast is just 1.8%.
What about help from the Federal Reserve? Recent interest rate rises mean that there would be scope to generate a monetary stimulus even if fiscal avenues are closed. Here the independence of the Fed is key. With wage growth, measured by hourly earnings, currently growing at over 3%, the Fed is likely to do nothing more than keep rates on hold for longer than was previously expected. Further, the Fed is no longer reinvesting the proceeds of bonds bought during quantitative easing and is hence engaged in some gentle quantitative tightening.
Most forecasts are still a long way short of predicting a recession and there are issues with using the payrolls data as a leading indicator, with employment typically lagging the economic cycle by around 6-9 months. Pessimists would argue that on that basis the economy may already be slowing much faster than the data would suggest, but others point out that other indicators, most notably the household survey of employment, still show a healthier economy – the problem with the more widely used measure is that it misses those who want a job but see no point in looking, and others that would have liked to work more hours than they did.
The bottom line is that, more than ever, there is a need to watch US economic data for further signs that a slowdown is under way. If that is what happens then the Trump administration may rue having brought in stimulative tax legislation earlier than they needed to – a delay could have countered an international slowdown and helped a national sense of well being at the crucial point in November of next year. After all, to cite a phrase from Bill Clinton’s election strategist, James Carville, in 1992, when it comes to electoral success: “it’s the economy, stupid”.