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Trump Improves the US Economy – But With Doubts About the Future

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During the last year of Barack Obama’s term, we saw a clear economic deterioration of the main indicators ,and even the leading indicators pointed to an eventual recession: weakened growth, stagnant unemployment rate and increasing the number of bankruptcies.

If we add to this a decade in which the wages of the Americans remained stagnant, the relocation of different companies to emerging countries, and a general discontent with the political class, we understand why Trump managed to be president of the United States, with policies so far removed  from those of the Democrats.

It is the first year since the inauguration of Trump, and it is an opportune time to analyze whether during this period marked by continuing controversies, especially regarding the immigration issue and climate change, the US economy has managed to improve in the last year.

The last year of Obama vs. the first year of Trump

In terms of economic growth, in the last stage of the Democratic president, Barack Obama, we saw that the year-to-year growth of the US economy suffered a sharp slowdown. If in January 2015, the growth rate was 3.8% at the end of Obama’s term, it stood at 1.8%, marking a minimum of 1.2%, corresponding to the second quarter of 2016, when alarms were triggered by the risk of recession.

From that point, during the first year of the Republican, Donald Trump, the US economy has accelerated progressively to an annual rate of 2.5%, dispelling the fears of a possible recession.

While Obama’s balance in terms of unemployment has been especially positive, during the last year we saw some stagnation in the decline in unemployment. In January 2016 the unemployment rate was 4.90% and one year later unemployment stood at 4.80%. From that point, in the first year of Trump, the unemployment rate has continued to fall, remaining at 4.10%.

Although much of the economic indicators are positive, US salary levels have been reduced since Trump took office. Salary growth has remained between 2.5% and 2.9% without showing any significant increase in the last 12 months. However, this could change because after the tax cuts, many companies have decided to raise the salaries of their employees.

Lastly, Trump criticized Obama for the high trade deficit during his time. Well of all ironies of life, in the last data of the US trade deficit (November 2017), the deficit was expanded to $50.5 trillion dollars, the largest trade deficit since January 2012 and exports to China and Mexico were the strongest in more than three years.

The Obama stage was a catalyst for the US public debt. On January 20, 2009, when he took office, the debt was 10.626 trillion dollars. On January 20, 2017, when he left, it was 19,947 trillion dollars, which is 9 trillion more debt, more than any other president in American history.

We must make a nuance, before Obama took office, the last budget of President George Bush -corresponding to fiscal year 2009- created a deficit of 1.16 trillion dollars. Technically, that fiscal year began on October 1, 2008 and continued through September 30, 2009.

That means that most of that deficit happened after Obama took office in January. But since it was not his budget, it is not exact to impute everything on Obama. Therefore, the actual imputation of US public debt would be 7,917 trillion dollars.

In this year of Trump, the value of the American public debt in September was 20.2 trillion dollars compared to the 19.9 trillion left by Obama, so in absolute terms the debt has increased.

However, if we analyze it as a ratio to the US GDP, there was a fall of 105% of GDP in the last quarter of 2016 to 103% in the second quarter of 2017. Despite this slight reduction, it is expected that in 2017 the government will of the United States continue to record a deficit of 693,000 million dollars, or 3.6% of GDP.
On the other hand, with the reduction of taxes and the increase in public spending, it is difficult to predict a positive path for budget stability and debt reduction. With these measures, the debt in monetary terms and as a percentage of GDP, will continue to increase under Trump’s mandate. According to estimates from the Congressional Budget Office, the newly reduced tax will add more than $ 1 trillion to public debt over the next decade.

That taxes are lowered – without compensating for a sharp reduction in public spending – and, in turn, the public debt increases, sounds a bit like the policy of “carrot and stick”. First, Americans receive the benefits of a tax cut, and then pass the bill on the debt and interest that will be paid via more taxes, more inflation or a combination of both.

The Stock Market adores Trump

The market cap of the companies that make up the selective stock market S & P 500, the main US stock index, on January 20, 2017, when Trump took office, was 20.5 trillion dollars. Currently the value of companies is 23 trillion dollars, which represents an increase of 2.5 trillion dollars.

However, since November 4, when Trump unexpectedly defeated Hillary Clinton in the US presidential election, the value of the S & P500 has grown by $4.1 trillion.

The S & P500 index has experienced an increase of + 31.84% from November 8 (presidential elections) until January 19, 2018. If we only take into account the evolution since Trump is president, the rise would be 24.06%.

The stock market is a machine that reflects discounted expectations, and remember that there was an increase in spending on infrastructure and tax cuts in companies that were expected to boost the corporate profits of listed companies. For that reason, we have seen increases in the stock market discounting that favorable scenario.

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