This Wednesday marks the anniversary of Donald Trump’s election victory, one of the most surprising and unexpected in US history. A year on we reflect on what effect the new president has had on the US economy and financial markets.
Before the election some saw Mr Trump as a Ronald Reagan-like figure who would pursue pro-growth policies, cutting taxes, boosting public spending and reducing regulation. Others focused on Mr Trump’s commitment to put America first and counter on ‘unfair’ foreign competition. During the campaign Mr Trump said his economic policies could virtually double trend US growth to 4.0% a year.
Plenty of others saw dangers in ‘Trumponomics’. Before the election 370 economists, including eight Nobel Laureates, signed a letter describing Mr Trump as “a dangerous and destructive choice” who posed, “a unique danger to the functioning of…economic institutions, and to the prosperity of the country”. Last June the ratings agency, Moody’s, warned that, if implemented, Mr Trump’s economic proposals could produce a prolonged recession and heavy job losses. In the immediate aftermath of the US election, Paul Krugman, the Nobel prize-winning economist, suggested a global recession was imminent.
In office Mr Trump has had less impact on the economy than either the optimists hoped or his critics feared.
US activity has picked up as expected before last November’s election, with growth this year likely to come in at an unspectacular 2.2% level. Next year should be a bit better. There’s been no Trump downturn nor a surge in growth. The Federal Reserve characterises the US recovery as “solid” and has felt sufficiently confident to raise interest rates twice this year, each time by 25bp, and is likely to do so again in December. Unemployment keeps falling though wage growth remains weak.
Despite talk of the uncertainties surrounding the new administration, standard indicators of confidence are upbeat. US equities have risen strongly since Mr Trump’s election and the VIX index, a gauge of financial market risk aversion, is close to a 25-year low. US business confidence has risen sharply in the last year. Consumer confidence is at a 17-year high.
Yet the performance of the US economy since Mr Trump’s election seems to have had more to do with the unfolding US economic cycle than the new administration. US growth was heading up at the time of last year’s election courtesy of cheap money and a global recovery. Despite the political fireworks the Trump presidency has not much altered the trajectory of the recovery.
The checks and balances in the US system, shifts in policy, changes in personnel and the inability of the new administration to build alliances within the Republican Party or Congress have blunted Mr Trump’s radicalism.
In the process a proposed $1 trillion infrastructure plan has been scaled back and the pledge to build a wall on the Mexican border, paid for by the Mexican government, has been watered down. A proposal to abolish ‘Obamacare’, the Affordable Care Act, did not make it to the floor of Congress.
On the economic front arguably the most notable event of Mr Trump’s presidency so far was last week’s appointment of Jerome Powell as Chairman of the Federal Reserve. Mr Trump’s earlier criticisms of the Federal Reserve had raised the possibility of a radical departure in this appointment. In the event Mr Powell, as an Obama appointee who has never disagreed with his predecessor Ms Yellen's monetary decisions, represents continuity.
The Trump administration could still achieve radical change on taxation. Last Thursday Republican lawmakers revealed a sweeping rewrite of the tax code, outlining a $1.5 trillion plan for major corporate tax cuts and more modest reductions for ‘middle class’ families. Whether there is appetite and consensus to get the bill through the House of Representatives remains to be seen.
Mr Trump’s powers over taxation and public expenditure are limited, but he has greater authority in other areas, especially foreign and trade policy.
The US administration has withdrawn from the Trans-Pacific Partnership, the Asian free trade agreement, in the process creating an opening for China to exert leadership in the region. The administration is seeking to renegotiate the North American Free Trade Agreement. Mr Trump’s appointee as head of the the Environmental Protection Agency, Scott Pruitt, is better disposed to deregulation and fossil fuels than his predecessor. In June Mr Trump said the US would withdraw from the Paris climate change agreement and seek a new deal that would not disadvantage US businesses.
These changes, and ones still to come, could yet make a significant difference to the US economy.
But so far the effects of Mr Trump’s presidency on the economy and financial markets have been small. In part this testifies to the constrained powers of the US president relative to a prime minister in a parliamentary system. To prevail US presidents have to build consensus. But this illustrates something else. Political fireworks are less important drivers of growth than the far duller triumvirate of monetary policy, the economic cycle and global activity.
PS – Last week we covered the nascent recovery in commodity prices. This week, oil prices hit a two-year high thanks to production cuts from OPEC. The IMF cautioned against the effects of rising oil prices, saying that “if the oil price goes up, the appetite for social and economic reform (in the Middle East, North Africa, Afghanistan and Pakistan) will go down”.
PPS - The Resolution Foundation said that the interest rate rise by the Bank of England will have a limited effect on households. Their research points to the fact that just over 40% of mortgages are variable rate, compared to a pre-crisis level of 70%. They also estimated the increase in interest payments by households that had variable-rate mortgages would average just £6.40 a month.