Setting the Baseline for Trump's Economy
Barely five weeks into his presidency, Donald Trump has already tried to shape perceptions about his economic record. His statement, “I have inherited a mess,” made several times at his Feb. 16 presidential press conference, was an attempt to push down the baseline against which his performance will be measured. But key indicators of economic well-being suggest a much higher baseline that he might find hard to improve on.
Let’s take a look at where the main indicators stand now.
The unemployment rate is 4.9 percent, with 7.75 million people unemployed. If Trump can improve or just hold that rate in place, he will have done a good job on that score. This assumes that the labor participation rate, which is 62.8 percent, is steady or rises. Right now, 151.4 million people are employed in the U.S., and whatever job creation Trump claims will have to be higher than that number. It will be simple to compare this employment increase with that under other presidents. 1
While the economy has not been in recession in seven and a half years, growth of the gross domestic product was low by historical standards in the Barack Obama administration, averaging 2.1 percent. The 2016 growth rate was only 1.6 percent, compared with 2.6 percent in 2015. The Trump economy might well be able to surpass this level. After his inauguration, Trump in fact promised 4 percent GDP growth (days later revised to 3 percent by Steven Mnuchin, now his Treasury secretary).
Higher growth would certainly be welcome, all other things being equal. But it would be meaningful only if it could be sustained over a number of years, and if it were achieved through real productivity gains. If growth were to be based on careless deregulation, for example, then the costs in terms of worse conditions for workers, damage to the environment and increased financial risks to the economy may outweigh any growth benefits.
For sure the market is expecting some good things from the Trump administration: deregulation, “big, big” individual and “massive” corporate tax cuts, and so on. The Dow has increased 13 percent in nominal terms since Election Day. And that is on the tails of a long ride of stock market gains during the Obama years.
Recall that the Dow stood at 6,626.94 on March 6, 2009, and was 19,762.60 by Jan. 20, 2017, a threefold increase. If Trump’s stock market were to achieve the same percentage increase, it would need to reach 39,348.92 by Jan. 20, 2021 (or 58,935.25 by Jan. 20, 2025, in the case of two terms), not adjusting for inflation. This is probably not going to happen, but the early signs are good. The real test is sustained stock market appreciation over a number of years.
How much of all the growth and prosperity that Trump promises is going to reach the poor? We’ll know if the percent of the population below the poverty line is significantly less than 13.5 percent, the level the rate had dropped to by the end of the Obama administration (43.1 million people of a total U.S. population of 318.5 million).
To lower this number, the new growth, if it happens, has to reach the poor mainly through new jobs and higher wages. Repatriation of jobs from renegotiated trade deals might help on the margin, but the risk is high that those jobs could easily be erased through automation in the near term. An increase in the minimum wage could have some positive impact on reducing poverty, though, again, at the margins, as most studies suggest. And in any case an increase isn't part of Trump's legislative agenda.
Federal Budget Deficits and the National Debt
The gross national debt stands at $19.4 trillion, or 105 percent of GDP. There’s not a lot of room for the debt to increase. The annual federal budget deficit is $615 billion or about 16 percent of the total federal budget. For these to fall, there would have to be some pretty sizable GDP growth to counter the promised infrastructure and military spending and large tax cuts. The real debt can also be cut through inflation, but this would also translate in high debt-service payments that would further strain the budget.
If there’s anything at all to Trump’s bold promises, then trade deficits have to drop significantly. In 2016, the trade deficit stood at $500 billion (in his address to Congress on Tuesday night, Trump claimed it was $800 billion), or 2.7 percent of GDP (compared with a high of $771 billion in 2006 and a low of $396 billion in 2009 during the depths of the economic crisis). The effects of renegotiated trade deals and the successful jawboning of companies into keeping manufacturing within U.S. borders will have to show up in this statistic and soon.
The president does not control gas prices, for the most part, though his policies can have an effect. But that doesn’t stop politicians from using the price of gas as a political weapon whenever possible. At the 2011 CPAC convention, the yearly conservative gathering, Trump predicted that gas prices would rise to $7 to $9. “Believe me, in a year or two from now you’re going to be paying that, as sure as you’re sitting there.”
As of mid-February 2017, the average price nationwide for a gallon of gas was $2.30 (U.S. Energy Information Agency). Let’s see where gas prices stand in the summer of 2018.
Looking at these seven indicators, we see that Donald Trump has inherited a generally improving economy, not a mess, and leagues better than the one Barack Obama inherited. Still, if Trump carries out the right policies, these baseline numbers should continue to improve.
An accurate portrayal of his performance depends on how much he can improve these numbers, not how far he can depress the baseline. This is critical to accurately distinguish success from failure, and therefore gain insight into which policies work and which do not.
So, let’s revisit these numbers one, two and three years from today and see where we are.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
The public has to be careful about being swayed by heavily publicized efforts to lobby companies like Carrier Corp. from exporting a few hundred jobs here and there. To put it in perspective, Trump would have to replicate the Carrier case 18,000 times to match the increase in employment during Obama's two terms.
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