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Is the Trump Economy Sustainable?

Irwin M. Stelzer

Growth trumps decline. That’s what President Trump is gambling on to hand him victory if the trade skirmish morphs into a trade war. The U.S. economy is growing at an annual rate of 4.1 percent and continues to create jobs. According to yesterday’s jobs report, the economy added 157,000 new jobs in June. That was a bit below expectations, but any shortfall was offset by upward revision of the April and May figures, which brought average job creation in the first six months to 224,000. Two possibilities: the slightly restrained hiring last month was due to the fact that there are so few workers available to hire, or employers are delaying expansion until the outcome of the tariff imbroglio becomes clear.

The unemployment rate ticked down to 3.9 percent, and the manufacturing sector added 300,000 jobs in the past 12 months. On the corporate side, profits remain satisfactory to all save the very greedy. They rose around 24 percent in the second quarter, the second largest increase since 2010. “We are the economic envy of the world,” boasts the president, abandoning his usual preference for understatement.

The key question is whether the current growth rate is “sustainable.” If sustainable refers to the near and middle term, the answer is “yes.” Here’s Goldman Sachs, in its carefully-reasoned and jargon-free midyear outlook, “(Un)Steady as She Goes,” concludes: “The likelihood of a U.S. recession in 2018 is close to zero. Over the next 12 months, . . . the probability of a recession remains at about 10 percent.”

Which would carry the Republicans into the November elections some 93 days hence with a booming, full-employment economy that just might offset the expected wave of Democratic votes from suburban women unhappy with the president’s demeanor, Supreme Court appointments, and position on abortion.

As we look further ahead, the question of sustainability becomes more difficult to come by. One school of thought holds that the economy’s performance in the most recent quarter is a “sugar high.” The 4.1 percent growth rate was due to deficit-fueled tax cuts and to purchases by the Chinese of goods that they knew would soon be the subject of tariffs. China’s orders are borrowed from future quarters, the tax cuts are already producing trillion-dollar deficits (twice those the Trump administration predicted) that will inevitably drive up interest rates and slow growth. It won’t be long before growth falls back to the 2 percent range—or the economy lapses into recession.

Other economists arrive at the same conclusion—unsustainability—by a different route. They argue that the economy is bumping up against a growth ceiling: more jobs available than there are workers to fill them. So desperate are employers that they have abandoned confronting potential job applicants with stringent qualification requirements, and instead have hung out “No experience necessary” signs. Amy Glaser, senior vice president of Adeco Group, a staffing agency with 10,000 corporate clients, tells the Wall Street Journal, “Candidates have so many options today. If a company requires a degree, two rounds of interviews and a test for hard skills, candidates can go down the street to another employer who will make them an offer that day.” Unless productivity per worker increases, which it has not been doing, rising demand will raise wages and prices, but not sustain annual growth of 4 percent in what the nation produces, its GDP.

Finally, and most vociferously, both Democratic and Republican politicians, many forecasters, and consumers and businesses hard hit by retaliatory tariffs say that President Trump’s tariffs will bring economic growth to a screeching halt. They will drive up prices on consumer goods and on the things manufacturers need (think aluminum for beer cans and steel for pipelines), force the Federal Reserve Board to raise rates sooner and higher to tamp down inflationary pressures, and drive companies that face retaliatory tariffs to set up shop in foreign countries (think Harley Davidson’s new factory in Thailand and Elon Musk’s plan to build Teslas in China). Rapid growth RIP.

Trump’s hand is strengthened by the fact that the American economic boom coincides with weakness in the economies of his adversaries. The E.U. economy is crawling ahead at its slowest rate in three years. Mexico’s is contracting, making its president-elect more willing to agree a NAFTA deal that’s more agreeable to the United States.

And China’s economy is under strain, with private-sector bankruptcies rising, domestic demand sluggish, and construction activity slowing. Although indebtedness already is dangerously high, the communist government abandoned efforts at tightening and the Politburo ordered the central bank to lend more than 500 billion yuan (over $73 billion) to banks, the largest sum since such injections started in 2014. It also is urging local governments to spend more on infrastructure to offset the projected two-tenths of 1 percent drop in GDP expected when Trump actuates the approximately $50 billion in tariffs he has already announced. If the president raises the 10 percent tariff being considered on an additional $200 billion of goods to 25 percent to offset the 6 percent fall in the yuan in the past two months, the pressure on the reluctant Chinese to come to the negotiating table will increase. The Chinese economy “faces some new problems and challenges [due to] obvious changes in the external environment,” announced the Politburo last week. That’s code for “tariffs are hurting.”

According to Larry Kudlow, Director of the National Economic Council, “The ball is in Xi’s court.” Kudlow probably is hoping that negotiator extraordinaire Trump will find him some way to allow the Chinese to resume talks without seeming to have bowed to the tariff threats that they see as blackmail.

But China’s announcement yesterday that it is planning new tariffs on $50 billion worth of imports from America—including aircraft and liquified natural gas, both products for which China is an important market—doesn’t sound like the statement of a country preparing to run up the white flag. Or one feeling pangs of guilt at the fact that its trade surplus with the U.S. in the first six months of this year ran to $185.7 billion, up $14.6 billion (8.5 percent) from the first half of 2017.

Markets reflect the strength of the president’s position. While the Shanghai Shenzhen CSI300 Index of China’s large-cap stocks has fallen by about 18 percent so far this year, and Germany’s Dax by 2.5 percent (despite its huge trade surplus), the S&P index of shares of 500 large U.S. companies has risen by almost 6 percent, the U.S. trade deficit notwithstanding.

Trump undoubtedly recalls from multiple viewings of the movie version of Henry II, Lion in Winter, that the aging king pronounced himself the winner in a negotiation with Philip II of France. When Philip, who had inadvertently revealed his plans, objected to that conclusion, Richard shot back, “To these aged eyes, boy, that’s [the meeting] what winning looks like.” To Trump the divergent performance in the American and Chinese share prices must be what winning looks like.

But Trump nevertheless persists in his pursuit of bilateral trade balances. At his press conference with Italian prime minister Giuseppe Conte during his visit to the White House last week, Trump complained about Italy’s surplus in trade with America. Never mind that the Italian economy is in the tank, and its 10.9 percent unemployment rate is more than double America’s 3.9 percent.

The European Union also runs a trade surplus with the United States, but it is growing at a meager 1.4 percent, and has an unemployment rate of 7.1 percent. Bilateral trade surpluses don’t guarantee prosperity and bilateral trade deficits don’t seem to prevent rapid growth.

That is a lesson the president’s principal trade adviser, a former economics professor, should be teaching his boss. Unfortunately Peter Navarro, the putative tutor, is the man who advised, “I don’t believe any country is going to retaliate for the simple reason that we are the most lucrative and biggest market in the world.” As an economic prediction, Navarro’s ranks right up there with Herbert Hoover’s “Prosperity is just around the corner” as the country sank into the Great Depression.

Trump’s preference for advisers who confirm his long-held economic misconceptions assures Navarro of long tenure in an administration famous for its high turnover. Pity, that.

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