Trump’s Booming Economy

Alan Zendell, February 2, 2018

The President has recently been touting the booming economy, and of course taking full credit for it. Trump points to the roaring stock market and the low unemployment rates as evidence. But is he right?

Let’s look at unemployment first. The following chart is taken directly from the Bureau of Labor Statistics for people over sixteen years old in percent of available full-time workers for the last ten years:

Unemployment

The sharp rise in unemployment in 2008 reflects the massive banking crisis that nearly toppled the world economy. The increase continued through the first few months of the Obama administration, but as the chart clearly shows, unemployment peaked at around ten percent at the end of the summer of 2009. After leveling off for six months, the unemployment rate began a steady decline that has persisted for eight years, that is, almost seven years of the Obama administration and the first year of Trump’s.

Everyone who studied economics knows that unemployment is a lagging indicator of the policies of any administration. If you enter a dark room you can simply press a switch, and behold, you get light. But market forces don’t work that way – you can’t create jobs instantly. A reduction in the unemployment rate must lag behind the implementation of even the best possible policy by a year or more. Every administration takes the blame for the failures of its predecessor during its first year, and benefits from its successes.

The chart clearly demonstrates that there is no correlation between the declining unemployment rate in 2017 and any policy implemented by the Trump administration.

Keep in mind, too, that the unemployment rate does not take into account people who have been out of work for several months and have stopped looking for a job. It also doesn’t count people who lost their jobs and decided to return to school and people who work part-time.

The unemployment rate reported by BLS always understates the real unemployment rate. By how much? That’s a great question, but no one knows the answer.

The fact that the decline in the unemployment rate as measured by the Department of Labor in 2017 was largely a continuation of the effect of policies put in place before Trump was elected is basic economics. It’s also interesting to note that the unemployment rate in the United Kingdom has tracked almost exactly with the rate in the United States since 2012, and the unemployment rate in Germany has consistently been between 0.6% and 0.9% lower than ours since 2015. Obviously, neither Germany’s nor the UK’s unemployment rate is related to anything Donald Trump has done as president.

Now let’s turn to the stock market. Market prognosticators come in all flavors, and prior to the 2016 election we were told by some that the equity markets would crash if Trump was elected and by others that it would take off and reach record heights. Most of that was just hot air being expelled from talking heads.

Equity markets rise and fall based on expectations of corporate profits. When you strip away speculation and computerized trading programs, it’s really very simple over the long run. What drove investors during 2017 was the expectation of a Republican tax bill that would greatly increase the prospects for corporate earnings. It was no surprise that 80% of all the benefits accruing from the new tax law will be in corporate bottom lines. Thus, the year-long rally in stock prices.

Can Trump claim credit for the rise in the markets? To some extent he can. He supported it, but the law he signed was a far cry from the one he promised. The new tax law was what Republicans have been trying to pass for decades. Its origins date back to when Trump was a Democrat. Trump may have supported it, but the victory belongs to the Republican majorities in the House and Senate.

If you have a financial adviser you’ve probably asked his or her advice about how to protect your investments and retirement savings in 2017. From where I sit, the most common advice was that speculation was likely to drive the market higher for all or part of the year. But savvy advisers understood that they were looking at a very fragile bubble that could burst at the first sign the administration was in serious trouble. And this administration has flirted with disaster from the very beginning.

Most people who follow stock charting theories believe in the cyclic nature of investment futures. In other words, in the world of investing, history tends to repeat itself. On the 30th anniversary of the stock market crash of 1987, CNBC published a fascinating chart that compared the values of the S&P 500 index for 1987 with those of 2017. Have a look.

Stocks1987_2017

Could the same thing happen today? To the extent that market levels reflect investor confidence, what might happen if that confidence suddenly crashed?

This week has seen evidence that the Trump administration is desperately trying to discredit the FBI, the Department of Justice, and Special Counsel Robert Mueller. Is that just Trump’s obsession with winning or might his administration be in serious jeopardy? No one but Trump’s inner circle know, but if you’re concerned about the psychology of the markets, you surely noticed that the S&P 500 dropped by a whopping 3.7% this week.

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