President Donald Trump says he’s presiding over “the greatest economy in the history of the U.S.” Federal Reserve Chair Jerome Powell says the economy is “in a good place.” Who’s right?
Neither, actually, although Trump’s assessment — sometimes supported by a specific statistic, more often than not unaccompanied by a data point — is a good deal farther from the truth.
But even the Fed’s appraisal may be too optimistic. Today’s “good place” is a fixed point in time. It changes, evolves, blows with the wind, is here today, gone tomorrow.
After raising the benchmark interest rate four times in 2018, Powell & Co. did an abrupt about-face in January and advocated “patience” — before losing patience with that approach and shifting to more stimulus, lowering the federal funds rate by a quarter-point in late July and again in September.
You don’t have to read between the lines to understand that the Fed’s intention in lowering interest rates was not necessarily to improve economic conditions but to prevent them from deteriorating, based on perceived risks from slowing global growth, trade policy uncertainty, and persistently low inflation.
In other words, by its own admission, the Fed was suggesting that a good place needs reinforcement just to stay good.
“Our job is to keep it there as long as possible,” said Fed Chair Jerome Powell in his opening remarks at a “Fed Listens” event in Washington last week.
What happens when maintaining a good place requires more than the Fed can provide via reductions in short-term rates, the traditional form of monetary stimulus?
While U.S. interest rates are higher than those in other developed countries, the federal funds rate is still quite low: in a range of 1.75% to 2%, with an 83% probability of another 25-basis-point cut at the end of this month, according to CME Fed Watch Tool.
Historically, the nominal overnight rate has been reduced by five percentage points, on average, to combat recessions. Such medicine is unavailable in today’s economy, and is likely to be a constraint going forward, according to the minutes from the Fed’s Sept. 17-18 meeting.
That means a return to quantitative easing or the introduction of negative interest rates, both of which are being reassessed in retrospect in terms of their effectiveness and potentially negative side effects.
At least the Fed is closer to reality than Trump, whose assessment of the economy as “the greatest in the history of the U.S.” doesn’t even qualify as “truthful hyperbole,” a phrase Trump coined in “The Art of the Deal,” a book he supposedly co-authored with Tony Schwarz.
While a president can’t claim credit for all the economic successes that accrue during his administration, Trump can point to a handful of statistics that support his assessment if not the “greatest,” at least pretty damn good.
At 3.5%, the unemployment rate is at a 50-year low. The unemployment rate for African-Americans and Hispanics is at an all-time low. (The Bureau of Labor Statistics first started breaking out the numbers for blacks and Hispanics in the 1970s.)
Average hourly earnings for production and non-supervisory workers rose 3.5% in September from a year earlier, down 0.1 percentage point from the post-recession high set in August. And the prime-age employment-to-population ratio rose to 80.1%, the highest since before the Great Recession.
Then again, the most widely accepted measure of an economy’s health is gross domestic product. On that score, Trump’s record lags behind many of his predecessors, challenging his claim that his economy is the greatest in the history of the U.S.
Since Trump took office in January 2017, real GDP growth has averaged 2.6%. That compares favorably with President Barack Obama’s 1.9% average but pales in comparison to 3.8% during the Roaring Nineties under President Bill Clinton, 3.6% under President Ronald Reagan in the 1980s, and 5.2% in the 1960’s under Presidents John F. Kennedy and Lyndon Johnson.
In recent years, actual growth has been curtailed by a reduction in the economy’s potential growth rate: the rate at which an economy can expand without generating inflationary pressures, which is determined by the growth rate in productivity and in the labor force.
That rate has downshifted to 1.8%-1.9%, based on estimates by the Fed and Congressional Budget Office.
So while second quarter growth of 2% may not sound great, it may be as good as it gets until some new new thing lifts productivity growth from the 1.4% average that has prevailed since the downshift in 2004.
Another challenge to the Fed’s “good place” is from threats emanating from abroad.
The trade war with China has disrupted global commerce, upended supply chains and sent global manufacturing into a de facto recession. Hong Kong businesses are reeling amid pro-democracy protests. Tensions are rising in the Middle East. And the manner and effect of the U.K.’s departure from the European Union are still uncertain.