By Rex Nutting, MarketWatch
Donald Trump doth protest too much. The louder he insists that everything is fine in the economy, the more we’re convinced that maybe it isn’t.
The economy is “strong,” “incredible” and “terrific,” according to President Trump. The best in the world. All the other presidents are envious of Trump’s beautiful economy, he says.
The fundamentals of the economy are “solid,” says Kellyanne Conway, a senior White House adviser skilled in public relations. Top economic officials — and skilled spin doctors in their own right — Larry Kudlow and Peter Navarro repeated the same talking points on the Sunday TV show circuit this weekend.
Airbrushed Tariff Man
There are elements of strength in the economy, for sure. But we know that Trump and his aides aren’t telling us the whole story. It’s an airbrushed version of reality, and the thing that’s been left out is the 800-pound gorilla better known as Tariff Man.
If the economy were really doing so great, we wouldn’t see the president of the United States debasing himself by begging the Federal Reserve for lower interest rates. We wouldn’t see the White House float (then kill and then float again) a trial balloon about a payroll tax holiday and another supply-side tax cut for the 1%.
The Federal Reserve certainly wouldn’t be cutting interest rates if the economy were as great as the White House says it is.
If the economic fundamentals really were “solid,” you wouldn’t see the White House sending out its cheerleaders to convince us. Trump and his aides would let the facts speak for themselves.
In fact, the economic fundamentals aren’t all that great. Some fundamentals are very good, but others aren’t. That’s par for an economy that’s growing at about 2% per year.
Let’s go through the fundamentals, one by one.
The consumer is the strongest part of the economy right now. Consumers are enjoying the sweet spot of the business cycle, with a very low unemployment rate. Consumption is strong and personal savings rates are up. Higher incomes mean consumer debts are manageable.
These aggregate numbers mask a lot of inequality, however.
Most of the income growth in the past 10 years has gone to the elites. It’s only now, with the unemployment rate far below what policy makers thought possible, that the middle class and the working class are finally reaping the benefits of the strong economy with fatter paychecks and more opportunities for a good job.
Households are more vulnerable to a slowdown than many think. A lot of families are one layoff slip away from poverty. They need this expansion to continue.
Consumers are still quite confident about the economy, but the Fed’s rate cut shook them up by making them wonder if they ought to hunker down and ride out the storm that’s coming.
This was supposed to be Trump’s long suit. He ran as a successful businessman who knew how to get the economy out of its rut. Fact check: Trump was never successful as a businessman, nor does he have a clue about what an economy needs from a president, which is a steady hand on the tiller and sensible policies for the greater good.
After a few years of rising sales and output, the wheels have started wobble, if not yet come off. Profits, while still high, are flat or falling. Businesses are dialing back their plans for new investments in structures, equipment and intellectual property.
There isn’t enough demand growth in the United States to justify higher capital spending, and with global growth slowing for multiple reasons (including Trump’s protectionism), foreign markets aren’t attractive either. The tax cut, its supporters promised, would realign incentives to invest and grow in America, but it didn’t even try.
U.S. companies are still shipping profits, plants and production overseas, where costs, especially taxes, are lower.
The tariff war with China could be the last straw for American businesses. Manufacturing is already declining. So is fixed investment. If businesses don’t find some reason to believe again, hiring would be the next shoe to drop, followed by lots of layoffs.
U.S. national wealth is at an all-time high, which ought to be reassuring. But the United States relies too much on asset appreciation and foreign capital to finance its spending and investment.
Household balance sheets are in better shape than they’ve been in more than a decade, but business and government debt have only expanded since the Great Financial Crisis of 2008.
Net savings have fallen to 2.4% of gross domestic product. That’s a big problem, because it means that Trump is fighting his trade war on the wrong front.
As economist Stephen Roach wrote a year and a half ago in these pages: “Far from sound, the fundamentals of a saving-short U.S. economy look shakier than ever.”
Trump’s trade war can’t be won, because nothing has been done to resolve the fundamental imbalances in the U.S. economy that drive the trade deficit and the current-account balance. The way the math works, as long as the United States needs foreign capital, we’ll have a trade deficit.
All tariffs do is make the economy smaller.
The bilateral trade deficit with China is meaningless (a point that is increasingly obvious as Vietnamese imports increasingly substitute for Chinese imports priced out by tariffs).
All the trade war does is disrupt global supply chains and force companies to postpone making any decisions about investment. And so, Trump’s inept and ideological protectionism does nothing to make the economy great.
Chaos from the Oval Office
There are other economic fundamentals to consider, including stable prices and strong institutions, such as an independent and proactive central bank, a stable and corruption-free democracy, and a culture of transparency and the rule of law. Those fundamentals are weakening.
The biggest shortcoming in our economic fundamentals is Donald Trump himself. A leader who thrives on chaos cannot guide the economy through turbulence to prosperity.
Sometimes Trump seems to understand this. On Tuesday, in one of his stream-of-consciousness soliloquies to the press, Trump briefly acknowledged that his trade war is hurting the economy (the Dow (DOW:DJIA) would be “10,000 points higher!”), but he said he didn’t care because someone had to do something.
“It’s about time, whether it’s good for our country or bad for our country short term,” the president said. “Long term, it’s imperative that somebody does this because our country cannot continue to pay China $500 billion a year because stupid people are running it.”
“So, I am doing this whether it’s good or bad for your — your statement about, ‘Oh, will we fall into a recession for two months?’ OK? The fact is, somebody had to take China on,” Trump continued. “My life would be a lot easier if I didn’t take China on.”
For the first time in modern history, a president has said What Must Not Be Said: “Recession? Bring it on!”
That’s a fundamental problem.
Rex Nutting is a MarketWatch columnist.