Three Key Questions About Trump and the Economy

Following the Independence Day break, the political world is digesting three bits of positive economic news for the Trump Administration. On July 1st, the current economic expansion became the longest since the federal government started collecting comprehensive economic statistics—a run of ten years and one month. Early last week, the stock market hit a new high after Donald Trump and Xi Jinping, the Chinese President, agreed to restart stalled trade talks. And, last Friday, the Labor Department reported that employers created two hundred and twenty-four thousand non-farm jobs in June, compared to just seventy-two thousand in May.

The jobs report, in particular, generated a good deal of crowing from the President and his economic advisers. “With July marking the longest economic expansion on record, it is a testament to the strength of the Administration’s economic policies that the economy continues to generate monthly job gains of this magnitude,” the White House Council of Economic Advisers said in a blog post.

It would be more accurate to say that the June job gains were a testament to the durability and steadiness of the recovery that began in the summer of 2009. If you look at a graph of over-all non-farm employment since then, it is virtually a straight line pointing upward. Look more closely and you will find that job growth has slowed slightly since Trump’s Inauguration. During the final twenty-nine months of the Obama Administration, the economy created two hundred and twenty-one thousand jobs a month, compared to a hundred and ninety-four thousand in the first twenty-nine months of the Trump Administration, the financial analyst Chuck Jones pointed out at Forbes.

Still, the fact that employers are hiring at a good clip this far into a recovery is good news for workers and people looking for work. For now, at least, it has allayed fears that Trump’s trade wars, combined with the effects of a slowdown in the world economy, might cause the U.S. economy to stall or even plunge into a recession. On Wall Street, analysts greeted the jobs report as evidence that the U.S.’s G.D.P. is continuing to expand, albeit somewhat slower than the 3.1 per cent rate that it recorded in the first quarter of this year.

From a political perspective, the positive news raises three key questions, the first of which is: Why isn’t Trump paying a higher economic price for his protectionist threats and actions, which have alarmed many U.S. businesses and, at times, rattled the financial markets?

One answer is that trade disputes with China and other countries are principally of concern to the manufacturing and agricultural sectors of the economy, which these days are dwarfed by the giant services sector. June’s employment report only underscored this fact. It showed that 12.9 million Americans work in manufacturing while 2.4 million work in agriculture and related industries. These numbers pale in comparison to the 107.6 million people who are employed in service industries, such as health care, education, and retailing. The health-care industry alone employs 20.4 million people; the leisure and hospitality industry employs 16.7 million; and retailing employs 15.8 million.

The fate of these service-sector industries is primarily tied to domestic factors, such as interest rates, fiscal policy, demographic changes, the level of home and stock prices, and household income growth. As the manufacturing and agricultural sectors have struggled in recent months because of the trade war, the services sector has continued to grow, offsetting weaknesses elsewhere. To some extent, this has inoculated the economy against the effects of Trump’s protectionism.

That raises the second question, which political strategists from both parties are analyzing closely: How much credit are voters giving Trump for the continued strength of the economy?

Over the weekend, a new poll from ABC News and the Washington Post showed Trump’s approval rating rise by five percentage points since April, to forty-four per cent, the high point of his Presidency so far. By way of explanation, the Post’s Dan Balz and Emily Guskin pointed to the buoyant state of the economy and a growing willingness among the public to give Trump some of the credit for it.

“The economy is the lone issue in the survey where Trump enjoys positive numbers, with 51 percent saying they approve of the way he has dealt with issues,” Balz and Guskin noted. “A smaller 42 percent disapprove of his handling of it, down slightly from 46 percent last October.” The Post article also highlighted the fact that the number of people giving Trump a “great deal,” or “good amount,” of credit for the economy’s strong performance has risen from thirty-eight per cent, recorded in a January, 2018, poll, to forty-seven per cent, in the latest one.

This is encouraging news for the White House. Gerald Ford, Jimmy Carter, and George H. W. Bush are the only Presidents since the Second World War to have been defeated in reëlection bids—in 1968, Lyndon Johnson declined to run again—and all of them were hampered by the perception that they had mishandled the economy. However, it is important to consider the data from other recent polls, which complicate the picture, and to think about what the economy may look like this time next year. After all, in most other democracies, the election campaign wouldn’t even be going until around then.

Although the polls suggest that Americans are getting more upbeat about the economy, many of them remain rightly skeptical of Trump’s role. In an Associated Press/NORC poll that was released last week, forty-seven per cent of respondents said that they approved of the President’s handling of the economy, while fifty-one per cent said that they disapproved. The poll didn’t provide a definitive explanation for this finding, but it did contain a couple of suggestive data points. Just twenty-six per cent of the respondents—about one in four—said that Trump’s tariffs would help the economy, and seventeen per cent—fewer than one in five—said that they paid less in taxes in 2018, when the Trump-G.O.P. tax bill went into effect, than they did in 2017.

These findings suggest that there is plenty of room for Democrats to make the argument that, whatever the headline figures say, Trump’s economic policies aren’t benefiting ordinary Americans. They also underscore the importance of the Democrats nominating someone who can make this case convincingly, especially to self-identified Independents. (In the current situation of intense polarization, persuading Democrats should be relatively easy, and persuading Republicans may be impossible.) According to a recent poll from YouGov and The Economist, Independents are currently divided about how Trump is handling the economy. Forty-five per cent of them strongly or somewhat approve; thirty-three per cent strongly or somewhat disapprove; and twenty-three per cent have no opinion.

The polls merely provide a snapshot of how things look now, of course. In the next sixteen months, economic conditions could change dramatically, and so could public perceptions of the economy. If the renewed trade talks with China break down, and Trump slaps on more tariffs, there could be a big sell-off in the financial markets, which, in turn, could spook consumers and hit spending throughout the economy. However, the Trump Administration isn’t the only important player here. When stock prices did fall sharply at the end of last year, the Federal Reserve stepped in with reassuring statements that hinted at a reversal in its interest-rate policy. These statements have continued ever since. But this raises the third key question: What will the Fed do now? Its action or inaction will help determine the economic outlook going into an election year.

On Monday, stock prices fell back a bit, as investors surmised that the strong jobs report made it less likely that the Fed chairman, Jerome Powell, and his colleagues on the Federal Open Market Committee will cut interest rates by half a percentage point at the group’s next meeting, which is scheduled for the end of the month. Even so, most Wall Street economists are still expecting a quarter-point rate cut, perhaps followed by another cut later in the year.

Having already said that the Fed would “act as appropriate to sustain the expansion,” a statement that Wall Street interpreted as a signal of rate cuts on the way, Powell is now in an invidious position. Strictly on the basis of the jobs report, it could be argued that lower interest rates aren’t absolutely essential. However, other economic statistics have been weaker, and the New York Fed’s “nowcast” model is indicating that G.D.P. expanded at an annual rate of just 1.5 per cent in the three months from April to June. (The Commerce Department’s initial estimate of second-quarter G.D.P. growth will be released on July 26th.) Moreover, if the Fed were to stand pat, it would likely provoke a negative reaction from investors, and it would certainly provoke an explosion from the President, who suggested as recently as Sunday that the central bank doesn’t know what it is doing.

So which way will Powell go? He might drop some hints tomorrow or Thursday, when he testifies on Capitol Hill about the Fed’s semi-annual report on monetary policy, which has just been published. At the other end of Pennsylvania Avenue, one viewer in particular will be watching closely.