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Beware the Ides of September, Mr. President

Irwin M. Stelzer

Who says that President Trump refuses to accept responsibility for anything? Just last week he bravely accepted responsibility for the soaring stock market and the good news emerging about the American economy, which grew at an annual rate of 2.6 percent, more than double the first-quarter anemic rate of 1.2 percent. And added 209,000 jobs in July, bringing the monthly average for the year to 184,000. “I have only just begun,” immediately claimed the Commander-in-Tweet, who believes his rollback of the regulatory state is responsible for healthy job-creation.

Not bad for the six months since Trump made the White House his working-week home. But not quite enough to satisfy Trump, who predicts, “We’re going to be higher than 3 percent in the not-too-distant future.” Pay no mind to the forecast of Fed Board members and bank presidents that the year’s growth will come in at 2.1 percent to 2.2 percent.

As measured by the S&P 500 index, share prices have jumped 15 percent to record levels since Trump sent Hillary Clinton into temporary retirement. Presidential cheerleading has never hurt share prices. But Trump’s support is only one reason investors feel their exuberance is rational. Another is the profits picture. Thomson Reuters estimates that by the time all U.S. corporations have reported second quarter earnings—60 percent already have—they will have risen by 11 percent, after a 15 percent increase in the first quarter. This is the first year since 2011 in which profits have grown by double digits in consecutive quarters.

The profits picture has been helped by the weak dollar, which has stimulated exports. Also, average hourly earnings in the private sector have risen by 2.5 percent to $26.36 since last July, enough to enable consumers to step up spending, but not so fast as to bite into earnings. In a welcome change from recent history, weekly pay of the lowest 10 percent of earners rose faster than the pay of any other group. And consumers are in reasonably good financial shape. They have kept their monthly obligations low by not running up larger credit card and mortgage debt than most can carry. Consumer confidence in both their current and future conditions rose sharply in July. Which buoyancy contributed to 3.9 percent and 6 percent increases, respectively in housing starts and issuance of permits for future construction this year as compared with 2016. Adding to the generally cheerful outlook is a recovery in Europe that has as one its by-products higher earnings for America’s multinationals.

What makes Trump’s claim for credit for all this good news so brave is that he now owns any reversal. Beware the Ides of September, Mr. President. The Stock Trader’s Almanac reports that the September performance of the three leading indices—the Dow Jones Industrial Average, the S&P 500, and the NASDAQ—on average is usually the poorest of any month.

Listen closely and you hear the sound of not one, but two canaries chirping. One is in your local bank. Regulators worry that banks are lending too freely to already-highly leveraged companies that establish their credit-worthiness with such sleights-of-hand as adding expected but as-yet-unrealized cost savings to earnings. This, say regulators, is “raising additional supervisory concerns should economic conditions decline.”

The other canary is singing away in Detroit. The red-hot auto market is cooling from the torrid pace of the past seven years, a pace that kept the economy’s growth rate from falling from an unsatisfactory 2 percent to an intolerable 1 percent or, dare we say it, slipping into recession. Compared with July 2016, last month’s auto sales were down 7 percent, and across all the major brands except Toyota, which is offering record-high discounts. GM, down 15.5 percent, Ford down 7.4 percent, Chrysler down 11 percent. Foreign brands were also hurt. Honda -1.2 percent, Mercedes-Benz -9.8 percent, BMW -14.8 percent, Jaguar -6.8 percent. Rolls-Royce managed a spectacular 33 percent increase, flogging 100 vehicles compared with 75 last July, but that won’t push up the economic growth rate.

To prevent sales from falling further, automakers are offering discounts averaging 10 percent and providing 72-month car loans to subprime borrowers who will be “under water” (having negative equity, to borrow a phrase from the pre-recession housing market) almost the minute they drive off the lot. Santander Consumer, active in the subprime market, reports that second-quarter payments on 9.3 percent of its car loans are overdue by 31-60 days, compared to 7.3 percent in the first quarter.

Sales slowdowns are causing “temporary” plant closures and layoffs, both likely to accelerate as automakers cut output to bring down inventories. GM has “temporarily” idled five plants and cut shifts in others, and Bob Shanks, Ford’s chief financial officer has warned analysts, “Don’t be surprised” at layoffs.

More impediments to faster growth are heading the economy’s way from Washington. The Fed will be tightening monetary policy, probably moving the dollar up and exports down. Republicans’ failure to pass a health care bill carries two additional bits of bad news. The first is that soaring insurance premiums—increases of 30 percent—will bite into consumer buying power and into profits of firms that provide coverage for their employees. The second is that the $1 trillion in health-care savings Trump was counting on to fund swinging tax cuts have not materialized. Arcane rules require that any budget passed without Democratic votes must be revenue-neutral over a 10 period. So, no $1 trillion in saving, no $1 trillion in tax cuts. Unless those cuts are offset with equivalent tax increases, or conservative Republicans can be persuaded to live with a ballooning budget deficit. Not likely.

Whether Trump is justified in taking an economic victory lap can be debated. That he should take the blame if the past proves not to be prologue cannot. Which would be only fair, especially if he can’t deliver promised tax cuts and an infrastructure program.

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