Surging US economy down to the ‘Trump effect’ – or just good luck

Usually a surging US economy is reflected in strong approval ratings for the president. So why are President Donald Trump’s poll ratings so low, despite strong growth? Or is it that were it not for the economy, Trump’s support would collapse yet further?

The Trump administration came into office as the economy started to move into a higher gear following a prolonged period of growth. The latest figures show that GDP was growing at 3 per cent in the third quarter and estimates are that the fourth quarter data could be stronger still, with some estimates of annualised growth of 4 per cent plus.

The unemployment rate, meanwhile has dropped to just over 4 per cent, close to what would be judged to be full employment. The US looks set to be the top performer among the world’s major economies this year.

Given that Trump has not implemented his promised economic policies, most of this would probably have happened no matter who won the last election. It is now clear that Trump inherited a strengthening economy.

However the president’s supporters argue that the “ Trump effect” has had a key impact – helping to push the stock market to record highs and underpinning economic confidence. The sustained growth “proves that President Trump’s bold agenda is steadily overcoming the dismal economy inherited from the previous administration”, according to commerce secretary Wilbur Ross.

Either way, whether it is good luck or good judgment, the incumbent normally gets the political credit for a strong economy. Doing so is now vital for the Trump administration, particularly as he tries to turn policy promises into action, moving into his second year in office.

In the midst of all the extraordinary turbulence of his presidency, Trump needs the economy to stay on track. Growth of 3 per cent plus a year is needed to help pay for tax cuts promised in this week’s plan. Yet this is far from guaranteed – and what Trump will do on trade policy remains unclear. Some believe he wants to undermine the current governance of world trade overseen by the World Trade Organisation, as the administration pursues the economically illiterate policy of eliminating trade deficits with key partners. Others believe he simply would not take the risk.

But perhaps the greatest dangers are the obvious ones. The first is of Trump’s presidency impinging on economic confidence, whether due to the growing inquiries into Russian links, tensions with North Korea or something as yet unforeseen. The president’s volatility is itself a major economic risk factor.

The second obvious risk is more mundane – the economic cycle. The US economy has now been growing – albeit somewhat slowly for some periods – for more than eight years, much longer than the normal cycle. With inflation picking up, the US Federal Reserve Board, its central bank, is starting to push up interest rates and is likely to continue to do so. If growth hits the skids, stock markets look vulnerable at current valuations and the feel-good factor could quickly disappear. The thing I don’t have a good explanation for is the tolerance the markets have developed for uncertainty that used to rattle them more than it does now. You look at the number of things where it’s kind of binary — whether things are really good or really bad, whether it’s North Korea, the possibility of trade wars, future deficits in the U.S. — the range of issues that have in the past made markets nervous, it seems they are kind of treated as a new normal.

Never one to take the conventional route, Trump says his policies can deliver an economic transformation. History would suggest, however, that like presidents before him, he will remain a prisoner of the economic cycle.

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