Surging US economy down to the ‘Trump effect’ – or just good luck

Trump – one year on: Given the president has not implemented promised policies, it is clear he inherited a strengthening economy

Thumbs up from Donald Trump: the US economy may grow more than 4 per cent  this year. Photograph:  Brendan Smialowski/AFP/Getty Images

Thumbs up from Donald Trump: the US economy may grow more than 4 per cent this year. Photograph: Brendan Smialowski/AFP/Getty Images

 

Usually a surging US economy is reflected in strong approval ratings for the president. So why are President Donald Trump’s poll ratings so low, despite strong growth? Or is it that were it not for the economy, Trump’s support would collapse yet further?

The Trump administration came into office as the economy started to move into a higher gear following a prolonged period of growth. The latest figures show that GDP was growing at 3 per cent in the third quarter and estimates are that the fourth quarter data could be stronger still, with some estimates of annualised growth of 4 per cent plus.

The unemployment rate, meanwhile has dropped to just over 4 per cent, close to what would be judged to be full employment. The US looks set to be the top performer among the world’s major economies this year.

Given that Trump has not implemented his promised economic policies, most of this would probably have happened no matter who won the last election. It is now clear that Trump inherited a strengthening economy.

However the president’s supporters argue that the “ Trump effect” has had a key impact – helping to push the stock market to record highs and underpinning economic confidence. The sustained growth “proves that President Trump’s bold agenda is steadily overcoming the dismal economy inherited from the previous administration”, according to commerce secretary Wilbur Ross.

Either way, whether it is good luck or good judgment, the incumbent normally gets the political credit for a strong economy. Doing so is now vital for the Trump administration, particularly as he tries to turn policy promises into action, moving into his second year in office.

Tough talking is now ahead to push the tax curs plan through

This week the House Republicans published a plan for tax cuts, which the Trump administration wants to see passed into law this month. The Trump rhetoric is that this could put the economy into a “higher gear”, particularly with corporation profits tax due to fall to 20 per cent, from 35 per cent now.

However, tough talking is now ahead to push the plan through Congress, with many arguing that, despite late changes, the rich still stand to be by far the biggest winners from the plan.

Meanwhile, the shape of Trump’s trade policy remains uncertain, with particular debate about his intentions towards Nafta, the trade agreement between the US, Mexico and Canada. Does the president want to reform this deal or abandon it? No one seems sure, perhaps – given the mixed signals emanating from the White House – not even the president himself.

Encouraged by his pro-business rhetoric and promises of lower taxes and less regulation, stockmarkets surged forward

The surge in the markets and the economy is in marked contrast to the prevailing mood on election night as it became clear Trump was going to be the next president. Then there was talk of a falling US dollar and a period of economic and market nerves, spurred by the president’s fighting talk on trade policy and his uncertain budget policy.

In the event, investors took a more relaxed view and, encouraged by his pro-business rhetoric and promises of lower taxes and less regulation, stockmarkets surged forward. The “Trump trade” has seen the Dow Jones Index gain almost 30 per cent over the past year.

In the midst of all the extraordinary turbulence of his presidency, Trump needs the economy to stay on track. Growth of 3 per cent plus a year is needed to help pay for tax cuts promised in this week’s plan. Yet this is far from guaranteed – and what Trump will do on trade policy remains unclear. Some believe he wants to undermine the current governance of world trade overseen by the World Trade Organisation, as the administration pursues the economically illiterate policy of eliminating trade deficits with key partners. Others believe he simply would not take the risk.

But perhaps the greatest dangers are the obvious ones. The first is of Trump’s presidency impinging on economic confidence, whether due to the growing inquiries into Russian links, tensions with North Korea or something as yet unforeseen. The president’s volatility is itself a major economic risk factor.

The second obvious risk is more mundane – the economic cycle. The US economy has now been growing – albeit somewhat slowly for some periods – for more than eight years, much longer than the normal cycle. With inflation picking up, the US Federal Reserve Board, its central bank, is starting to push up interest rates and is likely to continue to do so. If growth hits the skids, stock markets look vulnerable at current valuations and the feel-good factor could quickly disappear.

The risk for him is that strong growth has come too early in the electoral cycle and will inevitably wane

Trump has argued that his tax plan can push growth forward again. Economist Arthur Laffer, a Trump adviser during the election campaign, argued in a recent Financial Times oped that sustained growth of 3 to 4 per cent – up from 1.6 per cent in Barrack Obama’s last year in office – “is not just possible, but probable”.

Many economists are highly sceptical and warn that the tax cuts numbers do not add up – and that the plan is purely designed to line the pockets of the rich and corporate America. Time will tell if it even passes into law. But having benefited from a strongly growing economy in his first year, Trump is now doubling his bets on a buoyant outlook . The risk for him is that strong growth has come too early in the electoral cycle and will inevitably wane. The strategy, as outlined, is to implement policy changes which will give a permanent lift to the growth outlook.

Never one to take the conventional route, Trump says his policies can deliver an economic transformation. History would suggest, however, that like presidents before him, he will remain a prisoner of the economic cycle.

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