Trump and the Economy

How is the economy doing under President Trump? My pro-Trump friends tell me it’s wonderful. My no-Trump friends are unimpressed. So what are the facts?

First, let’s look at the unemployment numbers. Obama inherited a very unhealthy economy, with a rising unemployment rate due to the worst recession since the Great Depression. By the end of his first year in office the rate had stabilized and then began a steady decline that lasted through both of his terms in office. This decline in unemployment has continued during Trump’s 18 months in office.

Source: Bureau of Labor Statistics: https://data.bls.gov/timeseries/LNS14000000

Now let’s look at the Gross Domestic Product. The increase in GDP in the 2nd quarter of 2018 was 4.1%, higher than usual because shippers accelerated exports to avoid trade war tariffs. The previous quarter was 2.2%. The quarter before that was 2.3%. Obama’s best quarter saw 5.1% growth followed by 4.9% growth. In fact, GDP growth went from minus 8.1% in the 4th quarter of 2008 to plus 4.5% a year later. If Obama had been a Republican, GOP Congressmen would have been shouting his praise from the Capitol dome.

Source: Bureau of Economic Activity: https://www.bea.gov/national/xls/gdpchg.xlsx

After looking at these charts, the thing that stands out the most is that the economy has been stable and improving. Unemployment has been on the decline for eight years. Under Obama, GDP growth averaged just above 2% over his two terms in office. That is reasonable for a mature economy like the U.S. has.

The GDP can grow too slowly but it can also grow too fast. When the economy grows too fast, it “overheats” with too many dollars chasing too few growth assets. So investors start buying mediocre assets. When their value goes down, investors panic and a selloff ensues. Asset prices fall. That happened in 1999-2000 with the bubble in high-tech stocks. It happened again in 2005-2006, where the asset bubble was in housing. When the housing bubble burst, the result was a financial crisis. When an asset bubble bursts, the GDP usually goes negative and that signals a recession.

Politicians have said recently that they want a GDP growth rate of 3-4%, but economists agree that an ideal growth rate is 2-3%. If GDP growth spikes above 4% for several quarters, it usually means there is an asset bubble. So our economy is presently healthy. Obama handed Trump a stable economy growing a reasonable amount each year. Maybe Trump can keep the economic engine on the track. Maybe he can’t. We can only wait and see what happens.