- Donald Trump has completed almost three years of his presidency. On multiple occasions, he has touted a strong US economy and cited his administration’s policies for it.
- However, critics have been forecasting a recession and market crash for quite some time now. At least in 2019, Trump was right about the economy.
Trump on the US economy
President Trump frequently touts a strong US economy. He sees it as a result of his administration’s policies. Yesterday, Trump tweeted, “Stock Markets Up Record Numbers. For this year alone, Dow up 18.65%, S&P up 24.36%, Nasdaq Composite up 29.17%.” Then, he added the famous quote from Bill Clinton’s 1992 campaign, “It’s the economy, stupid.”
US economy and the Dow Jones
On the other hand, some observers have been forecasting a recession for at least a year now. From the China trade war to a yield curve inversion, recession pundits saw several recession indicators. However, as things turned out, there are no chances of a recession this year.
On the contrary, US GDP growth shattered expectations in all three quarters this year. The quantity that the US GDP growth beat expectations this year shows how bearish economists were on the US economy. Similarly, on stock markets, some observers were very bearish on the 2019 outlook.
However, Trump saw the Q4 2018 crash as a buying opportunity! Read Should You Have Taken President Trump’s Advice in December? for more analysis. Incidentally, US stock markets indices, including the Dow Jones Index (DIA) and S&P 500 (SPY), hit record highs this year.
US GDP growth shattered expectations
To sum it up, in general, economists got it all wrong on the US economy this year. Notably, earlier this year, while analyzing the US economy’s 2019 outlook, we had noted that things weren’t all that bad as the consensus view suggested. But then, in markets and in the economy, such consensus views rarely work!
That said, while a recession is not certain, a growth slowdown certainly is. US GDP growth fell sequentially in all three quarters this year. Also, corporate earnings fell for three quarters. Also, after the record stock market highs, the upside looks limited from these levels for 2020.
US labor markets are still strong: Manufacturing a concern
Now, looking at US economic indicators, they look pretty strong. Yesterday, the November jobs report was way above expectations. October numbers were also revised upwards. Also, the unemployment rate is hovering near multi-decade lows. Since the US economy is largely consumption-driven, a strong labor market helped buoy consumer sentiments and boosted growth. While job growth slowed down this year, it is still reasonably strong.
True, manufacturing activity has sagged, but then the manufacturing sector is not that big a contributor to the US economy. This is compared to manufacturing powerhouses like China and Germany. In November, while manufacturing jobs increased according to the Bureau of Labor Statics data, it’s mainly due to the return of striking General Motors (GM) workers. Also, while the US economy has slowed down, it still looks well placed after looking at the global slowdown.
The trade deal, US presidential elections, and Fed rate cuts
Now, the US economy surprised on the upside in 2019 despite all the noise over the US-China trade deal. On that note, this week is crucial for the Dow Jones as the next round of China tariffs are set to take effect next weekend. However, it is not certain that the tariffs will go ahead as planned. However, if the tariffs go ahead as planned, it would kill the optimism over phase one of the China trade deal.
We have the US presidential elections next year. Trump would need a strong US economy by his side next year to support his reelection chances. Notably, the US Federal Reserve lowered interest rates thrice this year. The Fed’s rate cuts helped lift market sentiments.
Notably, the Fed raised rates last year even as markets signaled that rate cuts are hurting growth as well as sentiments. Now, after cutting interest rates by a cumulative 75 basis points in 2019, the Fed put a hold on future interest rate cuts. So, next year, Trump might not get the desired support from the Fed.
US economic growth: Recession is not on the horizon
A US-China trade deal might help lift sentiments. However, failure to reach a trade deal might be a dampener. As for the US economy’s 2020 outlook, things look evenly placed. A recession still looks like a far-fetched proposition.
That said, in most economies including the US, it would be tough to counter the next recession amid low room for fiscal and monetary stimulus. Read Can Central Banks and Governments Control the Next Recession for more analysis.
You can also read Another Debt Ceiling Showdown Is on the Horizon. It provides more analysis to see how rising debt levels could threaten US economic growth.