Donald Trump may be broadly unpopular, but there is no denying that the US economy has improved since he took office. Unemployment is low, the stock market is high, and the effects of the $1.5 trillion tax bill passed in December are beginning to be felt. Indeed, since Trump’s inauguration, the economy has done something it has been unable to do since 2005 — maintain 3 percent growth for three quarters in a row.
America’s economy appears healthy from several angles. The three major stock exchanges in the US, the Dow Jones Index, Standard & Poor’s 500 index and the Nasdaq index, have all reached historical highs, with the Dow Jones having risen $5.5 trillion since Trump took office. The U.S. labour market has enlarged, with the unemployment rate hitting an 18-year low of 3.8% in June while wages are currently growing at their fastest rate in nine years. According to the Conference Board, consumer confidence is at a 15-year high, with its index at its highest level since July 2001. There have also been substantial improvements in business attitudes and consumer spending since the changing of the guard in Washington.
The Tax Cuts and Jobs Act – arguably Trump’s most significant act as President thus far- has cut the headline US corporation tax from 35 per cent to 20 per cent. In a number of cases, this tax saving has been passed on directly to employees in the form of wage increases. 345 companies had pledged to give their employees bonuses, pay raises, or increased benefits while at least 43 companies have offered permanent pay raises. The bill will also reduce taxes, on average, for most Americans between 2019 and 2025.
Trump’s next ambition involves balancing the federal budget- something which depends on maintaining the previously alluded to 3% rate of economic growth. Budget Director, Mick Mulvaney also believes the government won’t collect enough in tax revenue to achieve this fiscal equilibrium, negating Trump’ expansionary policies: ‘If we do not get to 3 percent growth, it is unlikely we will ever balance the budget again.’
Yet under Trump this relatively healthy figure has been maintained. In fact, some of The President’s previous detractors now admit that the impressive 3% growth could actually stay for the remainder of this year.
Despite this, the next year will determine whether Trump’s pro-growth policies can continue at their current rate. The gargantuan cuts in tax and vast increases in spending means the spectre of inflation now looms large over Washington. And with the threat of inflation, it is very likely The Federal Reserve (The Fed) will aim to curb such risk of overheating in the economy with interest rate rises which would dampen growth. Unlike fiscal policy (changes in taxes and spending), control of US monetary policy lies with the Fed and not Trump. The President may object to rate rises, but he is ultimately powerless.
To curtail inflation, the Fed could respond to Trump’s spending with a corresponding tightening of monetary policy. Indeed, the tension between Trump and newly-elected Fed Chair Jerome Powell could sour into open hostility. After a seven-year period of inertia following the financial crash, The Fed have been steadily increasing rates over the last 18 months and further increases are highly likely over the coming quarters. Opposing fiscal (expansionary) and monetary (contractionary) policies would cancel out any possible economic gain. However, both Trump’s spending and paltry increases in economic activity would create a debt for the American taxpayers. Having filed for bankruptcy six times, Trump is hardly going to be spooked by this prospect.
Many economists also caution against Trump’s pro-cyclical fiscal policies. With the economy performing so strongly, numerous commentators warn against overstimulating the economy any further. History teaches us that fanning the flames of economic growth in the good times has dire consequences when the fire burns out, which Jerome Powell recently cautioned against. Furthermore, Trump’s anti-immigrant legislative manoeuvres, inflammatory rhetoric and authoritarian posturing risk undermining to America’s prestige around the world, which could have a long-term negative impact on America’s growth potential. And now that he has imposed tariffs of 25 per cent on steel imports and 10 per cent on imported aluminium, Trump may also damage the integrity of the liberal global trade system.
But for the moment, with the economy performing this well, it would be foolhardy to dismiss the notion of Trump being re-elected in 2020. After all, when the average voter has more money in their pocket, the current Government is usually rewarded: just ask Fianna Fáil.
By Neil Stokes – Business Writer