To hear President Trump and his economics team tell the story, the U.S. economy was in shambles until they came along to fix it. The falsity of this claim is widely known to the majority who have learned that this president lies a lot. But as the overall U.S. economy has been posting some impressive numbers, it’s worth taking a quick dive into these claims.
To telegraph our punchline, our analysis clearly reveals that Trump is riding trends he inherited. He took office in year eight of a solid expansion, and he’s benefitting from its continuation. Yet, while growth remains strong, it is not reaching working people, and here, the President’s policies—specifically, his corporate tax cuts—are playing a role.
To be fair, presidents always take credit for growth on their watch (and defer blame for negative trends), but, as in so many other areas, Trump is different. His inaugural speech spoke of “American carnage.” This summer, he claimed that when he “Came up here, we had an economy that was going down.”
Here’s an easy way to see how patently false that is. In the figures below, we calculate the straight-line trend for a set of economic variables from Obama’s second term (so as to avoid picking up recessionary/early recovery effects) through the end of 2016, and then we extrapolate the trend through the most recent data point. It’s a simple but revealing test of the extent to which Trump is on, above, or below any trends that prevailed when he took office.
Figure 1 shows that the current unemployment rate is actually above its pre-2017 trend (implying that Trump is underperforming relative to trend). However, this is partly a function of the fact that as the economy closes in on full capacity, the decline in the jobless rate slows due to labor supply constraints (after all, the straight line in the figure would eventually cross zero, which doesn’t make sense). Still, this is a clear case of trend inheritance. Figure 2 shows the same thing for jobs.
Figure 3 shows that business investment spending is slightly above trend, and, in fact, there’s been a bit of a pop in such investment in 2018.This could relate to some of the measures in the 2017 tax law, such as the corporate rate cut and immediate “full expensing” of capital investments (deducting the full cost of buying machinery, for example). However, Figure 4 shows that the annual growth rate of real investment is no higher than it has been in recent years.
What about that 4.2 percent real GDP growth pop in the last quarter? There were two quarters with faster GDP growth than that back in 2014, and as the Figure 5 shows, real GDP’s just about on the pre-Trump trend.
So, are there any important indicators that reflect the “Trump economy?”
Oh, yeah, but unless you’re in the top few percent, they’re not pretty. Figure 6 shows that since Trump’s been in office, corporate profits (inflation adjusted) are up a fairly hefty 4.5 percent. But thanks to the big corporate tax cut, after-tax corporate profits are up three times that amount! The S&P stock market index is up even more. But real hourly earnings for mid-level workers have yet to crack 1 percent growth.
There’s your Trump economy, at least as of now. Lower unemployment could generate some faster wage growth in coming quarters (we expect it will), and such benefits of the tight labor market will be much welcomed.
But the fact remains that when an economy as large as ours is chugging along, presidents just don’t have all that much to do with aggregate growth rates. They’re more a function of the cycle of growth-generating demand, which in turn drives job and income growth, which begets more demand. What presidents can do, however, is influence who benefits most from that virtuous cycle, and, as that final figure above shows, Trump has unequivocally shown who’s side he’s on.