Trump inherits durable but sluggish economy
By Paul Wiseman and Christopher S. Rugaber
WASHINGTON, D.C. — Donald Trump inherits a much sturdier economy than the one Barack Obama carried into his second term four years ago. Back then, the scars of the Great Recession were still fresh. Joblessness was near 8 percent. Pay was flat. Europe faced a grave debt crisis that threatened to spread across the Atlantic.
Now? The job market, with steady hiring and just 4.9 percent unemployment, has proved durable. Pay is finally accelerating. Auto sales are near a record pace. Housing is stronger. Europe’s financial plight has stabilized.
Yet the Americans who elected Trump are longing not just for change but for a reversal of the Obama era — one that will ignite growth, slash taxes, restore lost factory jobs and curb most federal regulations.
Problem is, the economy’s most vexing problems — from an aging workforce to listless productivity to weak corporate spending — defy quick fixes. Trump has pledged an economic renaissance yet has avoided the broad policy prescriptions widely seen as necessary for managing a government.
Well before the election, Trump’s supporters came to distrust government data that pointed to a recovery and to question the interventions by the Federal Reserve to sustain growth. The economy’s long-standing shift toward workers with college degrees left people without them stuck with dimmer job opportunities and stagnant wages — a trend for which Trump blamed trade deals that he said led manufacturers to move overseas.
Given his extravagant economic promises, the hotelier, real estate developer and TV celebrity faces an uphill challenge.
“His lack of governing experience, potential difficulties building relationships with congressional leaders and inconsistent policy pronouncements during the race make it hard to predict his policy initiatives or his effectiveness in driving them through Congress,” Mark Haefele and Thomas McLoughlin of UBS wrote in a note to investors.
On the positive side, economists say they see no signs of the financial excesses or stalled consumer spending that often tip economies into recession. Yet with interest rates still near record lows, the Fed has little ammunition left to help should the economy weaken.
If things sour, Trump’s “policy options will be constrained, perhaps historically so,” said Patrick O’Keefe, director of economic research at the consulting firm CohnReznick.
Read more: Taxes? Trade? How Trump could affect key areas of economy
Since the recession officially ended in June 2009, growth has averaged a subpar 2.2 percent a year. Yet at 89 months old, this is the fourth-longest of 33 recoveries from recession dating to 1858, according to the National Bureau of Economic Research.
The Fed has signaled it’s confident enough in the economy to resume raising short-term rates at its next meeting in mid-December. Late last year, the Fed raised its benchmark short-term rate from a record low after having kept it there for seven years to help rejuvenate the economy after the recession. It had been expected to follow this year with several more rate increases.
But trouble overseas — especially panic over a sharp slowdown in China, the world’s No. 2 economy — and a slump in U.S. growth put the central bank on hold. The economy has also been slowed by a strong dollar, which has made U.S. goods costlier overseas. Tepid business investment, partly resulting from cuts in the energy industry in response to low oil prices, has hurt, too.
In the meantime, by historical standards, borrowing rates remain extraordinarily low. The average rate on a 30-year fixed mortgage was 3.57 percent this week, not much above the record low of 3.31 percent.
Many economists think super-low rates will remain in place for years, which is why they fret that there will be little room for the Fed to cut rates further to deliver stimulus in case of a recession. J.P. Morgan pegs the probability of a recession within the next three years at 66 percent.
“The tools that in the past have been used to combat a recession or try to enhance a decelerating economy are already exhausted,” O’Keefe says.
It’s possible, of course, that Trump and Congress will agree on some initiative that might help energize the economy — on infrastructure spending, for example, or tax reform.
For years, the economy has been hobbled by an older and slower-growing workforce and by lackluster gains in the productivity of its workers.
The percentage of adults who either have a job or are looking for one has dropped from 66 percent when the Great Recession hit in December 2007 to 62.8 percent. Retirements by the vast generation of baby boomers are part of the reason. But another factor is that many working-age Americans have been forced to the sidelines as blue-collar factory jobs have vanished. Many other people have left the workforce to go on disability.
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Productivity — output per hour of work — fell for three straight quarters (for the first time since 1979) before rebounding in the July-September quarter. Rising productivity is vital to raising Americans’ living standards because it allows businesses to pay employees more without having to raise prices.
The productivity drought is a puzzle to economists. Most had expected technology to speed efficiency. One explanation is that the heart of the economy has been shifting from manufacturing, where automation has produced big productivity gains — to services, where it hasn’t.
Another view is that America’s deteriorating roads, ports and bridges are slowing shipping and commuting times and making the economy less efficient.
“The economic cost is huge to having all those people sitting in cars and airplane tarmacs doing nothing,” says Ethan Harris, chief global economist at Bank of America Merrill Lynch.
For now, assuming that hiring remains solid with unemployment around historically normal levels, even tepid economic growth should manage to keep raising worker pay over the next couple of years, Harris says.
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Just don’t expect the economy to strengthen. Growth won’t likely rise much from its current listless pace of 1.5 percent to 2 percent a year, Harris says.
“There will still be a sense of disappointment in the economy for the average person, because growth isn’t going to get any better,” he says. “We’ve got to accept that 2 percent is good growth, not bad growth. That’s the norm now.”
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