Trump struggles to take political advantage of economic rebound
Donald Trump enjoyed more buoyant economic conditions in 2017 than any of his recent predecessors in their first year in power but his unpopularity could prevent Republicans from capitalising in November elections, analysts say.
The US president ended 2017 with a lower unemployment rate than his contemporary predecessors in their first 12 months. At the same time, share prices are at a record high, home values are, in nominal terms, approaching their previous peaks, and annualised economic growth is on track for three straight quarters exceeding 3 per cent.
By contrast, Barack Obama and George W Bush spent their first years in office grappling with economic downturns. While the surging economy should augur well for the Republicans in November’s midterm elections, analysts including William Galston, senior fellow at the Brookings think-tank, say history suggests the president’s approval ratings will act as a counterweight.
“Republicans are looking quite nervously at a White House whose major inhabitant has yet to stay above 40 per cent in job approval,” said Mr Galston. “That is not compatible with a strong Republican performance in the fall unless history has been repealed.”
The revitalised economy in Mr Trump’s first year confounded some economists’ expectations, as companies continued hiring and stepped up investing despite White House infighting, anti-trade rhetoric and an immigration crackdown that is unpopular with big business.
Economists attribute a large share of the credit for last year’s benign conditions to recession-fighting policies during the Obama presidency — and a recent Quinnipiac University poll found voters do as well. While wage growth remains tepid, the US is being buoyed by an economic upsurge that is broadening globally.
Nevertheless, some of the credit for reviving animal spirits belongs to Mr Trump, say economists. The big policy victory for the GOP did not come until the end of December with tax reform, but the administration has won corporate applause for efforts to slash regulation.}
In addition, Mr Trump’s victory, coupled with the GOP’s control of both the House and Senate, helped trigger an upsurge in corporate and consumer confidence that survived a year of torrid media headlines for the president. The Conference Board’s latest consumer confidence report showed the strongest reading for a December since 2000.
“One of the questions all along has been to what degree was that surge in confidence going to translate into actual economic activity,” said Lewis Alexander, chief US economist at Nomura. “We were sceptical in the beginning — probably too sceptical.”
The question now is whether that munificent economic backdrop will last, and how it will affect the GOP in 2018 and 2020 elections. Bill Dudley, the New York Fed president, set out a pessimistic case for the longer-term implications from the president’s tax-cutting policies. He warned that while a short-term growth lift was likely, the reductions will also increase government borrowing and could overheat the economy, forcing the central bank to clamp down with tighter interest rates.
The administration’s hardline immigration policies may also undermine efforts to address one of the big drags on potential growth — the sluggish expansion of an ageing workforce — as well as dampening employers’ ability to get qualified staff from elsewhere in the world.
Indeed, while growth is expected at about 2.5 per cent this year, according to the median forecast of Fed policymakers, the Fed’s estimate of longer-run expansion remains stuck at 1.8 per cent, with tax cuts generating no perceptible uplift. Given the ageing population, it will take an acceleration in productivity to deliver a genuine boost to potential growth.
Harm Bandholz of UniCredit argues America’s economic foundations cannot support a 3 per cent growth rate over the longer run. While spending may have picked up because surging stock markets under Mr Trump have made people feel wealthier, this is at the expense of a falling savings rate.
“We are getting a stimulus at the worst possible period,” he added, referring to the tax cuts. “You have an economy at full employment, a closed output gap, and you are adding stimulus and blowing up the deficit.”
For Republicans preparing for November’s elections, trillion-dollar tax cuts confer the ability to claim credit for the strong economic headlines that they hope will continue in the coming months. But as the Democrats themselves learnt in 2016, a firm economy does not necessarily translate into electoral success. While a record 63 per cent of Americans surveyed by Quinnipiac in a December poll called the economy “excellent or good”, more disapproved of Mr Trump’s handling of the economy than approved of it.
“The relative strength of the economy will be a plus for the party in power — that means the Republicans in this cycle. It is just a question of how big that effect will be given everything else that is going on,” said Mr Alexander. “The economy is not destiny when it comes to these things.”