• Abiye Alamina

How Bodes the US Economy?

Updated: Feb 2, 2019

Stock markets seem to have somewhat stabilized from the huge volatility that rocked the economy late last year. The government shutdown is over and federal workers will receive their backpay. The Federal Reserve left interest rates unchanged in their last meeting a few days back, and the jobs situations showed continued strong growth with over 300,000 jobs added (beating forecasts) and the labor force participation rate also ticked up by 0.1% to 63.2%.

By these measures and policy actions it appears the economy is doing very well and poised to continue its historic expansion this year.

There are no buts...

The unemployment rate rose to 4%, but this is largely cosmetic as it was due to the government shutdown which saw an estimated 800,000 federal workers either furloughed or working without pay. They are back to work... for now :)

The global outlook for the year has been downgraded by the relevant agencies that look into these things. The IMF has projected a weakening of the global expansion, but the main drivers are external - in China and Europe, and while in part related to the US trade policy, the impact on the US is minuscule as the international sector, while important, is still a relatively small part of the US economy.

Tied to this is the trade spat with China. There is apparently no deal on the table yet from negotiations but the so-called 90 day truce is still on (to expire March 1), and much of the rhetoric around the negotiations appear to be positive so financial markets are not worried about this for the time being.

So, for now, the US is doing well and, absent any major shocks that could affect confidence, should continue to expand for the rest of the year.

Kudos to Trump?

In a recent article I did note that it is difficult to tie positive economic outcomes to very contemporary policies put in place by any administration due to the usual lag between policy enactment and outcomes and so I was cautious and suggested that the economic expansion might not be credited to the policies of the current administration. Is this still the case?

I think my position may have changed. An argument could be made either way, for instance, yes, the tax cuts did spur a lot of confidence in boosting spending and stocks. Some economists believe that the boost will start subsiding, that is true but it is still likely that because the new tax law will also see many households get back more in tax returns from their filings that spending will remain elevated at least through the end of the second quarter. I have demonstrated this reduction in tax liability for households from the tax reform in an article I posted about the time the law was passed.

However, I am still not convinced on the Trump tariff policies as delivering net positive economic boosts to the economy. While a number of companies have been adversely affected by having to pay higher prices on their steel and aluminum inputs, consumers may not have noticed any passthrough in prices due to the higher wage gains resulting from the strong economy and from their higher post tax earnings. The adverse effect on the Chinese has also affected US company sales in China. Apple for example reported a downgrade in their revenue projections due to a sharp fall in demand in China.

Managing inflation (and employment) is the job of the Federal Reserve System - the Fed. While the Fed chair was appointed by Trump, much of last year saw the President criticizing the raising of interest rates by the Fed. It is a counterfactual outcome that cannot be known for sure if the Fed had acted more in line with the President's desires, but it is likely we may have seen inflation above target levels, and a dampening in consumer confidence may have followed.

Finally, the overall climate suggests that the regulatory environment is much more friendly to businesses and investment choices so this may be supply side economics delivering on its promise, however it should be noted that this rising tide may not be lifting all boats up equally and may be engendering greater inequality. In any case, we are witnessing a continued expansion in economic growth and it is all happening under President Trump's watch, so kudos to him.

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