June 8, 2017

Riding the Roller Coaster Economy with Trump

Bruce Yandle

Distinguished Adjunct Fellow
Summary

This is our economy. It is high time that we address that with some serious policy actions.

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A few days ago, President Trump offered a quick assessment of the economy and how it has been performing. In a few words, Trump said the economy was doing "absolutely tremendous" since he took office and, were it not for the lousy handoff from former President Barack Obama, we might even be doing better. He went on to say that "the economy is starting to come back, and very, very rapidly."

Trump likes to point to employment growth as an important barometer, and it is, indeed, a key measure of how we are doing. But a close examination of monthly gains in civilian employment, as well as a few non-employment metrics, tells us that we are not doing all that well.

Indeed, a five-month running average of new jobs added has been on a downhill trek since July 2014. If we call rising monthly gains in total employment an indication of a winning economy, then what we are seeing is a loser.

Yes, it is producing jobs, but at a diminishing rate. The truth of the matter is that the 2017 economy looks about like Obama's. Taken to extreme, if this continues long enough, the day will come when no new jobs will be added.

Is this because, after more than eight years, the economic roller coaster is reaching a peak? Are we hitting the bottom of the labor barrel? After all, the unemployment rate has reached a 10-year low point.

We need to dig deeper than employment to examine what is happening.

One sees another not-so-happy picture when examining monthly data on commercial and industrial loans, the most common category of business lending made by the U.S. banking system. Yes, each month's number is positive, which suggests there's a pulse, but on a five-month moving average, each month's number tends to be smaller than the previous one.

A somewhat similar, but slightly stronger, picture can be seen in the Institute for Supply Management's monthly manufacturing and nonmanufacturing indexes. They are both flashing growth, but at a sluggish pace.

Of course, there are other economic indicators that look more like winners. Take the University of Michigan's consumer confidence index, for example. Instead of heading south, this index is northward bound, driven heavily by respondents who label themselves Republicans, according to the folks who build it.

But if this roller coaster economy is indeed peaking, does that mean we should be worried about a nearby recession, in spite of Trump's optimistic assessment? Is it time to get out the sackcloth and ashes? No, not yet. We must remember that recessions are not formed because expanding economies are getting old. They generally come because of Federal Reserve actions that deliberately attempt to slow an overheating economy. As yet, our economy is not boiling over.

We've had a sleep-walking economy for a long time, and it's too early to tell what the Fed might do and what might happen when and if some of the Trump administrations' policy changes kick in. Tax reform could make a positive difference, as might regulatory reform. The effects of those changes, if they occur, will not show up for another year.

Meanwhile, we should keep in mind that this roller coaster economy can have serious turns and twists. And it isn't Trump's economy, any more than the previous one belonged to Obama.

It is our economy. It is high time that we address that with some serious policy actions.