This month marks the start of the eleventh year of an economic expansion that began at the end of the last recession. That surpasses the previous record for growth, set in the 1990s. The economy grew at an annual rate of 3.1% in the first quarter. The unemployment rate is at a 50-year low. Inflation is well below the Fed’s target, and wages have begun to rise, faster for manufacturing workers than for their supervisors. Even single mothers with no college education find that employers are offering them flexible hours and other benefits to allow them to overcome the impediments that have kept so many of them out of the labor market. The labor force participation rate continues to inch up. There are now some one million more job openings than there are job seekers. Oh yes, the economy added a whopping 224,000 jobs in June, suggesting that last month’s 72,000 was an aberration. Investors shuddered at the prospect that this good news for Americans might be bad news for them: the Fed might decide that a rate cut later this month is not really needed. After all, the economy does not seem to require a shot in the arm, and the Fed might reasonably decide to save its limited ammunition for use when and if the predicted slow-down occurs.
In this political year it is no surprise that we have a battle for the paternity of this record growth. Trump, never one to let a bit of good news pass without entering a claim to be the father, cites his tax cuts and deregulatory programs as the driving force. The Democrats have a bit of problem. They claim both that the credit should go to Barack Obama, and that the recovery has been tepid compared to past recoveries, and has not done much for the average wages of Joe the Plumber. The editorial board of the New York Times, the newspaper that is rapidly assuming the role of house organ to the Never Trumpers and the new Left of the Democratic Party, puts it this way: “These good times don’t feel particularly good. Economic growth over the past decade has been slow and fragile, and most of the benefits have been claimed by a small minority of the population.”
That’s a toned-down version of the expressed views of the 20-odd Democratic candidates for their party’s presidential nomination. They believe that Trump is presiding over the immiseration of the middle class, forcing workers to hold two or more jobs (actually fewer than 5% of American workers are multiple job-holders, and some of those see two jobs as an opportunity rather that a burden); discriminating against minorities (the black unemployment rate, 6%, is at a record low), and committing other assaults on the non-rich.
If growth continues in the 3% range Trump can see off his critics. But that is unlikely if recent data are any indication of what lies ahead. US factory activity fell for the third straight month in June, to what Timothy Fiore, chairman of a group that keeps its eye on that sector, calls “a relatively weak level.” The service sector recorded its slowest growth rate in two years, with new orders growing more slowly than at any time since December 2017. Sales of new homes dropped 7.8% between April and May to the slowest pace since the end of last year. Housing starts in May were almost 1% below the previous month and almost 5% below the May 2018 level. Auto sales have declined for six straight months.
The Conference Board reports that new orders of capital equipment are growing at the slowest pace since the beginning of 2017, and that its index of consumer confidence fell from 131.3 in May to 121.5 in June. “The escalation of trade and tariff tensions … appears to have shaken consumers’ confidence” says Lynn Franco, director of economic indicators at the Board. And Moody’s records that business confidence in America has declined steadily since August 2018.
University of Chicago economics professor Austan Goolsbee sees “the yellow lights of recession” flashing. The economy is not going to hell in a basket, he says, but seems headed to purgatory.
Economists at the Federal Reserve Bank of Atlanta say the economy is already slowing from its first quarter 3.1% first-quarter pace to 1.3% in the current quarter. And with what is called on Wall Street “the earnings season” about to begin, 77% of companies that issue pre-announcements say their profits will be worse than Wall Street is expecting. According to analysts at FactSet Research Systems, that’s the second worst quarter since 2006, when this reporting began. The President is hoping that will not cool the enthusiasm that has taken share prices to historic highs.
If it does, and if the economy slows as most forecasters are expecting, Trump will blame the Fed, even if it does lower interest rates later this month, as most Fed-watchers continue to expect. For the President, no matter the level of rates, lower is better. Jay Powell, his appointee as chairman, just doesn’t get it. “Here’s a guy, nobody ever heard of him before, and now, I made him, he wants to show how tough he is.” A showing not unfamiliar to the President.
Powell, of course, will argue that the coming rate cuts have nothing to do with Presidential pressure and all to do with uncertainty (caused by guess who’s stream-of-consciousness tweets) and by (guess who’s) tariff policies that are stifling international trade and slowing the economies of China and other US trading partners.
Trump is once again nominating to the Bank’s board candidates sympathetic to his views, this time candidates with plausible claims on confirmation. Judy Shelton, a monetary economist, was confirmed by the senate last year as the U.S. director of the European Bank for Reconstruction and Development. She has called for abolition of the Fed, a new Bretton Woods conference “if it takes place at Mar-a-Lago that would be great…”, supports zero interest rates to underpin “the pro-growth economic agenda that has been launched under the Trump administration”. Senators will be curious to learn how that is consistent with her prior calls for increases in interest rates and a return to the gold standard.
Christopher Waller, well-regarded director of research at the St. Louis Fed, is believed to favour lower rates and allowing inflation to creep above the Fed’s 2% target. Agreeable to the President. But in his careful study of Waller’s scholarly papers the President missed this statement, “A central bank’s independence … is the key tool to ensure a government will not misuse monetary policy for short-term political reasons.” Jay Powell couldn’t have said it better.