If recent public remarks are a guide, when President Donald Trump offers his assessment of the state of the union on Tuesday night, he will unequivocally declare it strong. He will talk about an economic boom “the likes of which the world has never seen before.” He will tout his exploits in commercial diplomacy, such as the “massive win” he secured for American workers by renegotiating the North American Free Trade Agreement and his “righting the wrongs of the past” by forcing China to buy more American farm goods.
Trump seems to be in denial of anything that doesn’t describe his perfectly adequate results as never-before-seen achievements.
The Democratic rebuttal is as sure to proclaim the opposite. To hear the party’s leaders talk, you’d think the U.S. still was stuck in its post-recession funk. “While there may be some indicators that are great for us — the stock market’s up, this or that — that isn’t increasing consumer confidence to the extent that we needed it to,” House Speaker Nancy Pelosi, D-Calif., told The Wall Street Journal in December.
So with staid economic data becoming the latest weapon in partisan warfare, how can we know the true state of the U.S. economy? For an answer, the genuinely curious should consult an expert source that has no stake in the outcome of the election.
The Bank of Canada, the Federal Reserve’s counterpart north of the border, has every incentive to get a proper reading of the U.S. economy. There is a saying in Canada that when the U.S. sneezes, Canada catches a cold. If the Ph.D. economists at Canada’s central bank get the U.S. wrong, it also will get interest rates wrong.
The Bank of Canada last week published a forecast that would displease Trump. It predicts that U.S. gross domestic product will expand 1.9 percent in 2020, a pace consistent with what most economists think the American economy can manage without triggering inflation but well below the rates Trump said he would deliver as president.
Get the think newsletter.
Still, Democratic hopefuls shouldn’t get too excited. The U.S. probably will lead big advanced economies, such as Japan and Germany, again this year with that figure. As far as the Canadian central bank is concerned, the U.S. economy is in decent shape. It describes consumer spending as “solid.”
Solid but flawed. In other words, so-so.
Trump will likely focus on the fact that American employers have created about 7 million jobs since the end of 2016. Adjusted for inflation, GDP increased 2.3 percent in 2019, while the unemployment rate was 3.5 percent in December, the lowest since 1969, meaning the U.S. has essentially reached “full employment ” — a theoretical state at which every qualified worker who wants a job has one.
It’s at this stage that marginalized workers find their way back into the workforce because employers are forced to loosen hiring requirements and shed biases to keep up with demand. To wit, the jobless rate for blacks has dropped to record levels.
All of which sounds pretty good — and it is. So how do Democrats with a straight face declare the economy isn’t working for Americans? To some extent, it’s sour grapes, given how important the economy is in determining the outcome of presidential races.
But it’s also the case that the positive indicators have some negative undertones. Take income growth, one of the most important statistics in determining whether Americans feel good about the economy. Average hourly wages grew 2.9 percent in 2019 — 1 percent when you factor in inflation — which is “hardly impressive,” according to Tyler Cowen, an economics professor at George Mason University.
The 2.3 percent increase in GDP, the smallest gain since 2016, is well short of what Trump said he would deliver. And like most brutes, Trump succeeded in squeezing some concessions out of smaller trading partners in the North American Free Trade Agreement, but for a negligible impact on the U.S. economy; dueling experts predict small growth or small losses.
“It is true that the picture is not entirely rosy,” Jean Pisani-Ferry of the Peterson Institute for International Economics in Washington wrote last week. “If anything, the trade deficit has increased. Distressed areas have not recovered. Inequality is still appalling. But this is no reason to overlook the positives. Assessment, rather than denial, is needed to shed light on what is happening.”
Part of the problem, though, is that Trump seems to be in denial of anything that doesn’t describe his perfectly adequate results as never-before-seen achievements. And an accurate assessment means not only confronting the flaws — workers in the Rust Belt and the inner cities are still hurting, for example — but also being honest about who’s responsible.
The U.S. economy has grown uninterrupted since June 2009, the longest expansion on record — and a milestone that Trump must share with his predecessor, Barack Obama, not to mention the Fed, which defied convention over the past decade by keeping interest rates unusually low.
Moreover, Obama was forced to deal with the deepest recession since the Great Depression. Trump, for his part, had a chance to take the economy to another level. Instead, he started trade wars with China, the European Union, Canada and Mexico, among others. That choked the global economy, killing demand for American exports. The cost of tariffs will also likely wipe out the benefits of wage growth, and whatever positive effect the tax cuts had was offset by his protectionist trade policy.
Whatever the strength of the economic state of the union at present, all that debt means the economy is more vulnerable going forward.
On the other hand, Trump’s policies have undeniably added a tremendous amount of debt. His tax cuts haven’t yet paid for themselves and probably won’t. The Congressional Budget Office projects that the federal deficit will widen to an astronomical $1 trillion in 2020, or upward of 4.6 percent of GDP. Debt is on pace to rise to about 81 percent of GDP this year and 98 percent of GDP by the end of the decade.
Whatever the strength of the economic state of the union at present, all that debt means the economy is more vulnerable going forward. Shocks like the 2008 financial crisis are difficult to see coming, which is one of the reasons governments used to strive to keep their houses in order. Today, it’s fears that the coronavirus outbreak could spread beyond China that have rocked stock markets in recent days. The solidity of Trump’s economy could be facing an imminent stress test.