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Judy Ford Wason Center for Public Policy

Wason Center

March 18, 2019

The Trump Economy in Context

Issue / National

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President Trump is fond of claiming that his economy is the “best economy in U.S. history.” Of course, the best economies of the country’s history occurred in the boom years after World War II as the U.S. turned its massive war-time manufacturing infrastructure to the task of rebuilding Europe and incidentally capitalized on its unique good fortune of surviving the entire length of the war with just one domestic attack. Despite the veracity of Trump’s overall claim, it is worth investigating the economy’s overall performance under Trump’s policies compared to his predecessor Barack Obama given the significant regulatory and trade policy changes Trump has institute since assuming office. However, it is important to properly contextualize any such analysis because Obama and Trump started their tenures under two diametrically different economic situations.

President Obama’s first term began in the midst of the Great Recession, the worst recessionary period in recent history.  Unemployment peaked around 10 percent just a few months after Obama’s inauguration, the U.S. was losing around 800,000 jobs per month, and labor force participation rates were at their lowest since the 1970's.  Additionally, household incomes were decreasing and would continue to decrease through 2012.  Despite these grim conditions, President Obama made many significant economic gains in his second term, many of which will be discussed at length later.  Among these improvements were steady increases in the stock market, increasing manufacturing output (albeit with decreasing manufacturing jobs), 75 straight months of adding jobs to the economy, and decreasing annual deficits despite an ever-increasing national debt.

Needless to say, President Trump’s economic starting-point was drastically different from that of President Obama.  While many economic measurements were steadily recovering from the Great Recession (more on that later), some hadn’t returned to their pre-recession levels.  For example, household incomes were still below their pre-recession amounts and the number of individuals on food stamps, while lower than early in Obama’s tenure, were still not as low as they once were.  Trump also made increasing the number of domestic manufacturing jobs a primary issue during his campaign.

So, has the economy improved under Trump’s tutelage?  The answer is dependent upon which metrics are used.

The Washington Post published an economic fact-checking analysis of the Trump and Obama economies.  It covers a number of indicators of economic performance and compares the president’s claims with both data from his administration as well as data from the Obama administration.

President Trump has repeatedly claimed that he has added nearly 4 million jobs to the U.S. economy since his inauguration.  According to data from the Bureau of Labor Statistics, there have been around 3.5 million jobs added to the U.S. economy in the first two years of his presidency.

However, more jobs were added every year during Obama’s second term than during the first two years of Trump’s term. Of course, it is easier to have large jobs gains when there is a lot of room for growth, as is the case when the economy is recovering from a massive recession. Still, today’s positive jobs report continues to build on Obama-era growth.

President Trump has also argued since his campaign about strong unemployment numbers during his tenure. The two main measurements of unemployment (U3 and U6) have both been steadily declining since they peaked in October 2009. When considering the U6 rate, the decline in unemployment over a two year period is roughly the same for the Trump administration as it was for the Obama administration on average.  However, the U3 measure has seen a slightly smaller decrease during the Trump administration than the Obama administration on average.  It has also been relatively stable in recent measurements.

GDP growth has been relatively stable since President Trump took office.  In the fourth quarter of 2018, real GDP increased at a 2.6% rate, slightly lower than the Q3 rate of 3.4%.  Growth rates from previous quarters have decreased since Q2 of fiscal year 2018.

However, an economy’s health can more accurately be captured by the deficit-to-GDP ratio.  This measures how much a country is earning in relation to how much it is spending.  During Obama’s two terms, the ratio was consistently lowered until there were small increases at the end of his second term.  During Trump’s first year, the ratio increased again to 3.4%.  This is likely due to the fact that his tax reforms will result in less tax revenue for the federal government, thereby increasing the deficit.  In December 2018, the federal deficit was reported to be $14 billion, down from the roughly $24 billion deficit from one year prior.  The CBO is estimating the full fiscal year’s deficit to be roughly $897 billion.  This is roughly 4.2 percent of GDP and well more than the prediction of $176 billion from before the passing of the recent tax reforms.

Another hot economic topic is average wages.  President Trump has said that wage rates were rising for the first time in a long time after he came into office.  However, wage rates have been increasing since mid-2014 after a steady decline since the Great Recession.  Again, it would seem that this phenomenon is the result of a continuing trend from the Obama administration rather than developing from economic policies instituted by the Trump administration.

So, what’s the conclusion here?  Ultimately, it seems that a number of economic indicators are increasing only as a result of continuous trends present during the Obama administration.  Of particular note is the deficit-to-GDP ratio, which has actually increased as a direct result of Trump’s economic policies.

It’s also misleading to assume that the economy is improving based on only these criteria.  In December of last year, retail sales were down 1.2%, which was the largest decline since September of 2009 following the Great Recession.  However, the validity of the report which contains this figure is being called into question.  Amazon reported high sales for December, suggesting that the significant decline overall may be exaggerated.  Economists have argued that the recent government shutdown, the longest in U.S. history, may have impacted the data collected for the report.  White House economic adviser Larry Kudlow has also called the report’s validity into question.

The report suggests a startling potential trend.  If consumer spending continues to decrease, it’s likely that the U.S. will experience a reduction in GDP growth, as consumer spending makes up more than two-thirds of the total U.S. economy.  In addition, data from the week of February 3-9 show an increase in the number of unemployment claims.  Of course, increased unemployment points to decreased consumer spending due to a reduction in household income.

It’s also important to consider that the size of the U.S. economy, which is measured in trillions of dollars, has increased by roughly $4 trillion since the end of the Great Recession.  This is a long period of growth according to conventional economic standards.  Provided the U.S. experiences steady growth through July, it will set a record as the longest-recorded expansionary period on record.  Most economists believe that growth will continue through this point; however, while still expanding, the growth is slowing, leading many to conclude that a recession is in the not-so-distant future.

Many economists have predicted an impending recession due to the fact that the world economy has been slowing as of late.  The U.S. economy, a heavily globalized economy, will surely begin to feel the effects of this phenomenon at some point this year.  Most experts are pointing to the cause of slowing growth as President Trump’s “trade war” with China.

The tariffs placed on China by the Trump administration have significantly increased the price of steel and aluminum for U.S. manufacturers, which in turn is putting pressure on the economy.  Additionally, since the tariffs have been instated, China has responded with a boycott on American exports, putting even more pressure on the economy.  The role these tariffs are playing in the economic performance of the U.S. cannot be understated.  Economists have said that poor trade policy decisions would have an extremely detrimental effect on economic performance.

Externally, economists are pointing to signs of recessionary effects in other economies, suggesting that the U.S. will follow suit.  Data shows that the economic performance of the EU is getting close to recessionary levels.  Economist Paul Krugman has said that little can be done about the EU’s declining performance because interest rates in the economy are already negative.  He also said that he believes the U.S. will enter a recession later this year or in 2020.

Another vitally important factor in economic performance is policy decisions made by the Fed.  The biggest issue facing the Fed is attempting to return interest rates to normal levels.  Interest rates had been held at minuscule levels for nearly seven years before the first raise in rates during 2015.  The Fed increased rates four times in 2018 alone.

Initially, the Fed had planned on three rate increases in 2019 but has since changed their prediction to two increases.  The real number of increases is dependent on the performance of the economy.

In addition to rate increases, the Fed will also be phasing out its bond-buying practice.  Known as quantitative easing, the practice involves buying Treasury and mortgage-backed bonds in order to keep interest rates low while also injecting additional financial resources into the economy.  Economists have estimated that eliminating the practice will have the same effect as a 1.3% increase in interest rates.  When coupled with the rate increases already enacted by the Fed, this results in a net rate increase of 5.5%.

David Rosenberg, an economist with Gluskin Sheff + Associates Inc., is quoted as saying that no period of expansion has continued following such severe rate increases by the Fed.  Many economists, however, believe that these effects won’t result in recessionary effects until 2020.  Of course, should a recession take place before the 2020 election, it will no doubt be an integral campaign talking point and would likely shift support away from Trump’s reelection efforts.

Along one measure, one Republicans argued was vitally important during the Obama years, the American economy is once again heading in the wrong direction. The huge deficits racked up starting in the mid-2000's from the Bush tax cuts, Medicare Part D, and wars in Iraq & Afghanistan increased exponentially when the Great Recession hit and the Treasury was forced to spend massively to stabilize the nation’s banking system and to stimulate the economy. Upon assuming office, Obama brought the wars onto the formal balance sheets and the national debt hit the $20 trillion mark. Due to austerity, the national debt had stabilized and annual deficits had declined during the last few years of the Obama Administration but the Republican tax reform law passed last year has reversed that trend and added $2 trillion to the national debt when growth estimates failed to materialize. In February, the national debt hit a record $22 trillion.

 

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