This is Trump's economy, two years in
Posted January 20, 2019 8:19 a.m. EST
CNN — President Donald Trump's third year in office begins with the federal government shut down, global growth slowing, and a stock market in turmoil. The economic policy decisions of the first half of his term accelerated growth in 2018, but most forecasts show that momentum evaporating going forward.
An enormous tax cut and continued spending growth added rocket fuel to a slow recovery that started in 2010 in the wake of the financial crisis. At the same time, an array of tariffs have upended supply chains and raised prices, throwing businesses into a fog of uncertainty.
A year ago, Trump could still have laid blame for the condition of the economy on his predecessor. Today, it's his to own, for better or worse.
"Net-net we're doing slightly better, especially in the short run, because the fiscal stimulus probably has greater upside weight than the negatives, which tend to be longer lasting and more prolonged," says Greg Daco, chief US economist at Oxford Economics. "The economy has really eaten its cake, and doesn't have much left on the table."
Here are the major ways the Trump administration has impacted the economy so far.
Tax cuts and rising deficits
The Tax Cuts and Jobs Act of 2017 dumped billions of dollars into the US economy, and even more came from Trump's first budget, which beefed up the Department of Defense and cut little else.
Much of the cash went back to shareholders in the form of stock buybacks, but it did fuel a bump in business investment and goosed growth in the third quarter to the highest level since 2014. The Tax Policy Center estimates the tax cuts added 0.8% to gross domestic product in 2018, at a time when growth globally was petering out.
"Over the course of 2018, most major economies around the word started to slow down, and the US did not," notes Courtney Rickert McCaffrey, with the management consulting firm AT Kearney.
That additional stimulus helped the job market tighten to the point where workers who previously had been overlooked, including people of color, veterans, the disabled, and the long-term unemployed, came into the labor force and posted their lowest unemployment rates in decades.
However, the boost is projected to fade in the coming years, down to 0.5% in 2020 and a negligible amount in 2027. The extra growth also came with bigger federal deficits, with revenue expected to drop by about $1.9 trillion over ten years, according to the Congressional Budget Office.
"From what I have seen, I don't think this is a long-term productive investment in the US economy's ability to grow in a sustainable way," McCaffrey says.
A crisis in international trade
Trump's trade policy has been an emotional rollercoaster for businesses that depend on either imported components or overseas markets.
Relief that the Trump administration reached an agreement with Canada and Mexico on minor revisions to the North American Free Trade Agreement has faded in the face of Trump's threats to pull out of NAFTA if Congress won't ratify the new deal.
And dread over the cost of tariffs that now apply to nearly $300 billion in US imports is compounded by the fear of new tariffs on even more Chinese goods if a deal isn't reached.
Oxford Economics estimates the tariffs shaved between 0.1 and 0.2% off of growth in 2018, and the Tax Foundation projects they will eliminate 94,303 jobs over the longer run.
The tariffs have one beneficiary: Steel producers, which have been steadily hiring people and adding capacity since Trump took office. But anyone else who uses steel and aluminum — or produces any of the thousands of goods that have been the subject of retaliatory tariffs from China, Canada, and the European Union — has suffered.
The Federal Reserve's latest Beige Book, an anecdotal survey of business conditions across the country, mentioned "tariffs" 20 times — mostly in connection with how manufacturers are trying to raise prices to compensate for higher input costs. In a separate survey of 1,257 small business CEOs by the executive coaching company Vistage, only 4% said they benefited from the tariffs, while 43% said they had a negative impact.
"Whatever benefit they experienced from the tax cut, the tariffs have upset that," says Vistage research director Joe Galvin. "The challenge they face is, how do I pass that cost along? This is a direct profit hit. It comes right out of margins."
Taking a hatchet to regulations
The White House has consistently talked up its effort to cut "red tape" as a major accomplishment in freeing businesses to be more productive rather than spending time and money complying with federal rules. A report released recently by the Office of Information and Regulatory Affairs claims that the cost savings amount to $33 billion since Trump took office.
That's not much in the context of a $20 trillion American economy, as the Brookings Institution pointed out. And many of those savings estimates depend on not counting the economic consequences of the additional risks to health and safety that come with lifting regulations — much of which is eventually borne by the government.
However, the widely-publicized rollbacks of Obama-era rules like one governing small rivers and streams and another increasing emissions standards for passenger cars and light trucks may have fueled some of the exuberance of mid-2018, as evidenced by the National Federation of Independent Business' all-time high optimism index reading in August.
"I don't know it's had a substantial effect as much as there's a belief that it's had a positive effect," says Galvin, of Vistage.
Rolling up America's welcome mat
Sometimes you don't have to have an official economic policy in order to have an economic effect — all you need is tweets.
Trump's rhetoric and crackdown on immigrants and visitors — starting with the early, chaotic rollout of a travel ban on visitors from some Muslim-majority nations — has deterred foreign visitors and international students, who have been coming to the US' tourist attractions and universities in lower numbers over the past year.
"Many foreigners don't like Trump or they — mistakenly, in my view — think that he doesn't like them," wrote Trump campaign advisor Steve Moore wrote in a report commissioned by a coalition of travel industry associations about the need to promote America as a destination. "We know that this can persuade foreigners to avoid coming to the US and spending their money here."
It's apparent in other dimensions as well. Foreign direct investment in the US dropped sharply in 2017 from the previous two years and actually turned negative in the second quarter of 2018. That means foreign businesses are less interested in building factories and buying companies in the US.
And it may be taking a toll on America's attractiveness to foreign scientists and engineers, who are choosing employers in Canada over those in the US.
"Restrictions and delays in visa and passport applications have weighed down on immigration," says Daco, of Oxford Economics. "From an economic perspective immigration is a positive, so reducing immigration has weighed down on the economy."