Recently released economic numbers paint a mixed picture. The October jobs report indicates 128,000 additional jobs, exceeding expectations related to the General Motors strike. President Trump insists that the “real” job gain is over 300,000, a figment of his imagination. The positive jobs report was accompanied by continued low unemployment, at 3.6%. The economic growth rate is reported at a credible 1.9%. Those numbers, indicating a continuing tepid economy, are far from the total picture.
The week was accompanied by the third successive Federal Reserve reduction of short-term interest rates that was widely anticipated. By forecasting the reduction, Fed Chair Jerome Powell had painted himself into a corner. Had the Fed not reduced interest rates, financial markets would have tanked, and Powell would have been blamed. In addition to taking heat from Wall Street, Trump would have blasted Powell for not having “obeyed his orders” for a greater reduction. Even with Powell’s dovish stance marked by three successive interest rate reductions, Trump continues to blast Powell for not reducing rates to zero.
Trump’s “orders” for the Fed to reduce rates to zero is yet another indication that Trump knows not of what he speaks. Many economists, and some bankers who are members of the Fed’s Board of Governors, believe that the Fed should have left interest rates unchanged, saving these reductions for when they will be needed. That time will certainly come, but nobody can forecast when.
The Fed’s cut, along with the positive jobs report, resulted in rising financial markets as of this writing. These markets, flirting with new records, make investors happy, along with Trump who labors under the illusion that the stock market is the economy. It isn’t, as the vast majority of stocks — some 80% — are owned by only ten percent of the people.
Economics is often referred to as “the dismal science.” Even in the best of times, there is plenty to worry about. We are far from the best of times for the vast majority of the American population. The chief source of economic instability, affecting political instability as well, is the continued growing gap in wealth and income between the very wealthiest Americans and everyone else.
Recent reports indicate a 3% year over year increase in wage growth. While this is indeed welcome, and long overdue, it does not reduce growing income inequality. But this is a small percentage of a small number, and it’s still smaller than a larger percentage of a larger number, such as the double-digit growth of the annual incomes of Fortune 500 CEOs.
Other clouds on the horizon include a softening world economy, continued declining business investment and declining manufacturing. Declining business investment is due largely to uncertainty associated with Trump’s tariff wars. Interruption of supply chains and the “on again-off again” nature of trade talks have created the uncertainty that inevitably results in corporate reluctance to invest and expand.
Powell’s accommodation to Trump’s insistence on low interest rates — even though he hasn’t followed the ludicrous recommendation of reducing rates to zero — puts the performance of the economy on Trump’s shoulders. It’s up to Trump to deal with the trade wars. Trump’s advisors continue to paint a rosy scenario but in reality, Trump is dealing from weakness.
The serious increase in farm bankruptcies, and farmer suicide rates, are tragic indications that Trump’s tariff wars have clearly hurt farmers. However, rural voters still remain among his most loyal supporters. Recent polls indicate that around 70 percent of farmers who voted for Trump plan to do so again.
Wall Street money managers continue to be played by Trump’s tariff games. Each time he announces progress, financial markets rise, only to fall again when China conveys reluctance. How long these supposedly astute managers will continue to be played is an open question.
The trade wars have not yet seemed to affect consumers in a major way. Consumers are still spending and supporting the economy even as business investment is soft. The kicker in this is that much consumer spending is financed by credit card and vehicle debt. In case of a recession, or even a significantly softening economy, the combination of reduced income and high debt would be devastating.
A recent phenomenon relating to debt is that the once-normal three-to-five-year vehicle loan has been replaced by five-to-seven and even eight-year loans. Therefore, when vehicles are traded in before they are paid off, the unpaid debt is rolled into the new loan, and the borrower is then paying for an asset no longer owned. Such poor individual money management along with a softening economy spells trouble ahead.
Another cloud on the horizon is the yet-to-be-realized full damage of the Trump/Republican 2017 tax bill. It was billed as “great legislation” that would “pay for itself.” No economists other than conservative ideologues like Larry Kudlow and Peter Navarro bought into that rosy scenario.
That tax bill, an enormous gift to corporations and the nation’s wealthiest citizens, created a temporary sugar high. But instead of stimulating the promised business investment, corporate tax cuts resulted in stock buybacks and huge salary increases for corporate hierarchy.
As critics predicted, the tax bill created record federal deficits and public debt that should not occur during economic expansion. Those tax cuts and the resulting increased public debt, along with unnecessary interest rate cuts, have put this nation in an extremely difficult position to deal with the next recession. It may not occur during the Trump administration, but there will eventually be a time when we need expansionary fiscal and monetary policies to counter it.
This is all in addition to the difficult structural economic problems that not even sound fiscal and monetary policy is equipped to address.
Trump’s advisors and Wall Street cheer rising financial markets and assure us that all is well.
This all proves that memories are short.
— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears Saturdays in the Monroe Times.
