Economics & Growth | Politics & Geopolitics | US
To say that Donald Trump’s unusual leadership style has been deeply polarizing is an understatement. He is the only President in US polling history to have consistently negative net approval ratings, and yet that’s not stopping him from running for re-election in 2019. But what are his chances?
US leaders presiding over a strong economy are typically re-elected, so to better understand his chances, we review the performance of the economy under Trump, comparing it with Obama’s second term (given his first was amidst a recession).
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To say that Donald Trump’s unusual leadership style has been deeply polarizing is an understatement. He is the only President in US polling history to have consistently negative net approval ratings, and yet that’s not stopping him from running for re-election in 2019. But what are his chances?
US leaders presiding over a strong economy are typically re-elected, so to better understand his chances, we review the performance of the economy under Trump, comparing it with Obama’s second term (given his first was amidst a recession).
Trump Invokes the Reagan Fiscal Playbook
The surge in business confidence in the first year under Trump was due to significant corporate tax reform. The effective tax cut was less, however, in part because companies could previously avoid paying taxes by keeping foreign profits offshore. This restricted their ability to use those profits.
Tax reform lowered the Federal corporate tax take and provided significant post-tax financial resources for US companies. The hope had been that this would fund higher investment; the reality was that it fuelled higher disbursements to shareholders, helping sustain equity valuations.
A Quick Glance
Registered Democrats were far more confident consumers than Republicans during Obama’s second term. It’s the opposite under Trump (Chart 1). Yet despite this difference, economic data shows that performance under the two Presidents has actually been similar, including in areas where Trump is often perceived to have done better (e.g. growth and equity prices).
There are important differences, though. The bilateral US trade deficit with China has risen by more under Trump ($73 bn) than it did Obama’s second term ($41bn). The budget deficit has ballooned under Trump, having fallen under Obama – Trump has been a high-spender, while Obama cut.
It Was The Best Of Times…
According to the Misery Index, which tracks inflation and unemployment as ‘bad’ and has been hitting record lows, the economy in the first 31 months of the Trump Presidency has performed as well as it has ever done. As Fed officials consistently argue, the economy is in ‘a good place’, supported by Trump’s eternally bullish tweets.
Trump’s GDP growth record has not been that impressive, however (Chart 3). In the first 7 quarters, growth will have averaged about 2.55%, SAAR (seasonally adjusted annual rate), which is actually 15 bps less than in the same period under Obama. As the economy approaches full employment, it is harder to grow at pace. Strong late-cycle growth typically requires stronger investment, which has been falling under Trump.
A similar point about the constraints of a tight labour market applies to private payroll growth. This has been weaker under Trump than it was in Obama’s second term (Chart 4). To date, Trump has averaged private payroll gains of 180k per month, versus Obama’s 215k.
Trump’s Early Hits: Deregulation and Manufacturing
The business community quickly warmed to Trump. Surveys of business leaders jumped, peaking in 2018Q1 (Chart 5). Lighter regulation was welcomed after a phase of over-reaction under Obama, but its impact is hard to measure. One sector it clearly helped was oil production, where output has boomed under Trump (Chart 6). However, domestic oil production also boomed under Obama’s tougher regulations, slumping in the later months of his presidency only due to global price developments and market concerns over oil-related junk debt.
The other sector conspicuously lifted under Trump has been manufacturing, which also enjoyed regulatory relief. A global upswing in 2017 also helped. (Chart 7)
…It Was The Worst of Times
Both manufacturing and business confidence indicators fell sharply over the past year as the Administration moved to implement a populist protectionist trade policy. This policy began early in 2018 but became far more serious in Q3 – doubtless to be seen as Trump’s economic high-water mark. Sectors that initially championed protectionism such as steel are suffering from the policy’s global consequences, and business leaders previously cheering deregulation now face new trade regulations and restrictions. Most concerning for them is the uncertainty of what lies ahead. The farm sector has been especially hard hit by Chinese retaliation to Trump’s trade policies – agriculture income in 2019H1 was down about 15% relative to 2017H1. To date, real wage growth in the Trump Presidency has averaged 0.7%oya; in the same period under Obama, it averaged 0.9%oya.
Trump Invokes the Reagan Fiscal Playbook
The surge in business confidence in the first year under Trump was due to significant corporate tax reform. The effective tax cut was less, however, in part because companies could previously avoid paying taxes by keeping foreign profits offshore. This restricted their ability to use those profits.
Tax reform lowered the Federal corporate tax take and provided significant post-tax financial resources for US companies. The hope had been that this would fund higher investment; the reality was that it fuelled higher disbursements to shareholders, helping sustain equity valuations.
The tax cuts were accompanied by a significant boost in Federal spending, whereas that declined under Obama (Chart 9). Remember the Affordable Care Act, however, implemented in Obama’s term two. The proportion of the population without health insurance fell by about 6% between 2012 and 2016 (to below 8%). In 2018, it rose by 0.6%, back to 8.5%. The combination of tax cuts and higher spending produced the inevitable result that the Federal deficit moved sharply higher in the Trump Presidency relative to what occurred in Obama’s second-term (Chart 10). The decline in the budget deficit after 2010 occurred under Obama as he was facing an unfriendly Congress, forcing fiscal austerity. The inflection point in US fiscal trends came late in 2015, when there was a bipartisan agreement to ease spending caps, led by former Speaker Paul Ryan. Trump inherited a widening budget deficit in early 2017; his actions accelerated that trend.
The Equity Market View: A Tale of Two Halves
Remarkably, 729 days after the Trump win in November 2016, the US equity market is up by almost the same cumulative amount as it was during Obama’s second term (Chart 11). On a net basis, the US equity market has not moved much for the past 22 months. Under Obama it rose about 47% from its position on election day. As of today, the Trump equity market is up about 35% since election day.
The mix of policy between the two administrations has been different. Under Obama, fiscal was tighter and monetary easier and the reverse under Trump. As a result, the USD real effective rate has been about 14% stronger during Trump’s term-to-date.
The Bottom Line
All in all, comparing Trump and Obama, data don’t lie – one is a reckless spender, who blew the budget; the other a believer in a role for bigger government. The results are fascinating but can be summarized by noting that (economically) things were going well for Trump until the trade war with China was started. Ending that (before too long) will be necessary, although maybe not sufficient, for the President to be re-elected.
Phil Suttle is the founder and principal of Suttle Economics.