Page 14 - The Economist20171214

14 Leaders The Economist December 16th 2017
The American economy
Can the Trump boom last?

America’s presidentis notthe architectofthe economy’s strength. Butin the shortterm things will go his way
HERE is often more fakery real worry. The proposed taxcuts are paid for by bigger budget
US unemployment rate Tthan truth in a tweet from deficits, a fiscal stimulus that is ill-timed given the business cy-
%
President Donald Trump. But on cle. But the tax cuts favour companies (which in aggregate are
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one subject he is broadly right. generatingbumperprofits) orrich individuals (who save more
America’s economy is in good of their income). That means the ripple effects from the stimu-
5
shape. Business confidence is lus are likely to be small.
0 high. Jobs are plentiful. Last The riskthat the Federal Reserve tightens too much is aggra-
2007 09 11 13 15 17
month non-farm companies vated by a change in the make-up ofits rate-settingcommittee,
added 228,000 workers to their payrolls. The unemployment which will take on a more hawkish tinge from next year. In-
rate is 4.1%, the lowest figure for more than a decade. The avail- deed, nothingMrTrump doesislikelyto have a bigger effecton
ability of jobs is drawing more of the working-age population the economy than his choices to fill Fed vacancies. But the
into the labour force. Wages are growing in real terms with tightening so far—the Fed raised rates by another quarter of a
some ofthe biggest gains goingto low-paid workers. percentage pointthisweek, to a range of1.25-1.5%—hasbeen ap-
Mr Trump over-eggs things, of course. He claims each good propriate. As for financial imbalances, pockets of excessive le-
jobs report and each new peak in the S&P 500 as his own verage exist. Butthe stockmarkethasreached newhighs asreal
achievement. In fact, he was lucky in his inheritance. The mar- interest rates have fallen: yields have dropped across all asset
ket has risen by 25% since his election, but is up by 195% since classes, from property in big cities to junk bonds. Asset prices
2009. The unemployment rate fell from a peak of 10% to 4.7% may be high, but there is a logic to theirascent.
under Barack Obama and then to 4.1% on Mr Trump’s watch.
His administration says that a mix of deregulation and cor- Still has bite
porate-tax cuts will spur sustained GDP growth of 3%, well Amature cycle also has pluses. Investment is one. Aglobal up-
above the 2% average of recent years. As the economy ap- swingin fixed capital spendingisalreadyin train, led byAmer-
proaches full employment, an astonishing pickup in produc- ica but not confined to it. It is fuelled in part by a drop in uncer-
tivity would be needed to accomplish that. tainty about the global economy. Businesses that have been
But Trump-bashers overstate their case, too. They dismiss reluctant to make long-term bets when one or other of the en-
the optimism of consumers and bosses as sentiment, not sub- ginesofthe world economyhasbeen sputteringare now more
stance. They warn that the stockmarket is dangerously over- willing to put their money to work (see Schumpeter). Invest-
valued and that America’s expansion, which is in its 102nd ment has also followed a surge in profits, reflecting stronger
month, must soon falter. Yet the economy is not in immediate GDP growth, as it tends to. As workers become scarcer in
danger. And the maturity ofthe business cycle cuts both ways America’s tightening labour market, firms have a greater in-
(see page 63). It makes a nonsense of Mr Trump’s claims to be centive to automate.
the author ofAmerican economic success. But the economy is A second boon of a maturing cycle is higher productivity,
also capable ofsome welcome surprises. which hasrisen ata snail’space in all countriessince the global
financial crisis. More capital spendingby businesses will help.
Long in the tooth And in America, in particular, firms are under pressure to reor-
America is not the only economy doing well. For about a year, ganise their businesses to meet expanding demand, because
a synchronised global expansion, taking in Europe, Asia and low unemployment makes it harder to find additional work-
the Americas, has been under way. GDP growth in the euro ers. America is not about to return to pre-2005 rates ofproduc-
zone, a region until recently synonymous with economic mis- tivity growth, whatever Mr Trump tweets. But there are tenta-
ery, is around 2.5%, despite slower population growth than tive signs that the rate is starting to pick up from its dismal,
America’s. ButAmerica standsoutbecause ofwhere it isin the post-crisis slump.
cycle. If it continues in 2018, this expansion will become the All expansions eventually come to an end. Even ifAmerica
country’s second-longest ever. does not inflict a recession on itself—through ill-judged trade
True, there are perils. As the business cycle matures, there is policies, say—a global shock could do the job. When that time
more chance that the economy will overheat, because of comes, America’s policymakers will end up regretting how
bottlenecks in the jobs market; or that the central bank over- government revenues were squandered on a badly designed
tightens in order to prevent things from running too hot. The taxcut. The deficitsthatresultwill make itpolitically harderfor
longer the economy keeps growing, moreover, the more scope Congress to agree on a fiscal stimulus to combat the next
there is for financial imbalances, such as excess debt or frothy downturn. Interest rates will in all likelihood peak at much
asset prices, to build up. Some warning signals are flashing. lower levels than in the past, limiting the scope for big cuts to
The gap between long-term and short-term interest rates has fight a recession. In this, the worrywarts are entirely correct.
narrowed, as it tends to before recessions. But the immediate outlook is sunny. The global upswing is
Yet the evidence for overheating is thin. Inflation has still young, and has momentum. MrTrump’s policies have lift-
trended lower this year. Wage growth has picked up a little, ed the spiritsofbusinessleaders, who alreadyhad reason to be
thankfully, but shows few signs of accelerating. Pay would confident. Galling though it must be to the president’s critics,
have to increase by quite a lot more before rising inflation is a America’s economy is well placed for2018. 7