It’s that time again. The US presidential election is back on the agenda with all the usual frenzy of news, forecast and discussion. We’re not getting involved in the political debate but instead focusing on the economic outcomes of the Trump presidency, which might give some indication of whether he will be re-elected or not. In short, is the US stronger now than it was three years ago? This is what matters most when managing our investors’ money.
First, the points in Trump’s favour.
- In terms of avoiding recession, Donald Trump is so far the president who has overseen the longest economic expansion period in American history. As of February 2020, the US has gone 131 months without a recession. The country was already in its fourth longest period without recession when he started his presidency – he will no doubt take credit for extending the record stretch, which seems likely to last until at least the election in November.
Source: Macrobond, Nutmeg
- With record low unemployment, the US under Trump has continued to create jobs beyond the 4% rate which was seen up until recently as an unbreakable floor. With a current rate of 3.6%, unemployment in the US is at its lowest level since 1969.
- The housing market, after the 2009 collapse, has shown a solid recovery. After a period of calm, growth in housing permits has accelerated to reach the highest year-on-year increase since the 2008 crisis.
Source: US Census Bureau
- The strength of the equity market, by itself far from being proof of good economic health, will help Trump appeal to electors, who tend to be highly sensitive to the performance of the stock market. Although it has suffered a fall due to the coronavirus outbreak, the US stock market has generally performed positively during Trump’s presidency and has largely outperformed the rest of the world.
Source: MSCI, Bloomberg
- The dollar is still strong, despite record tax breaks and an increasing deficit. Confidence in the dollar hasn’t evaporated and the exchange rate against major currencies is roughly the same as it was three years ago, having consistently increased over the last 18 months.
But it’s not all good news
Those are the positive economic stories. What are the negative points that will cloud the picture? There are three main ones: Trump’s unnecessary trade war with China, the unequal share of growth in the US, and the increased level of deficit at this point in the cycle.
- The US-China trade war has been described as more challenging for China than the US, but looking at the manufacturing purchasing managers’ index (PMI), it seems the US shared the bulk of the decline. Sentiment in US manufacturing declined from a record high of 56.5 prior to the beginning of the trade war in the first quarter of 2018 to barely 50 in August 20191. In the same period, the China Markit PMI barely moved, going from 51 to 50.4. With many manufacturing jobs concentrated in America’s industrial midwestern states, which voted en masse for Trump, the trade war might have a big impact on the Trump vote. In contrast, in the stock market, manufacturing companies are dwarfed by technology and other service companies.
Source: Institute for supply management, Markit
- Inequality has risen. Under Trump, the top 1% have gained a larger share of total US wealth, increasing their wealth by more than 18% during his presidency. This is a much bigger increase in wealth than the middle classes have enjoyed. In terms of financial sectors, manufacturing and farming have generated much less growth over the period than other sectors. A poll conducted by the Financial Times in October 2019 found that nearly two-thirds of American voters didn’t think their economic condition improved during Trump’s presidency despite all the positive factors discussed earlier.
Source: The Federal Reserve, Distributional Financial Accounts
- The deficit has grown. The extension of the US economic cycle and record low unemployment was stimulated by creating a large fiscal deficit. Even though the federal deficit is lower than at some points during the Obama administration, it has been increasing due to Trump’s tax breaks and increased spending. Such an increase at this point of the economic cycle is almost unheard of.
Source: US Treasury
A mixed picture for Trump as America goes to the polls
Overall, it’s difficult to argue against the strength of the US economy during the Trump presidency. We’ve seen the longest growth expansion on record, a record low unemployment rate and a flourishing stock market. But rising inequality will probably have a major impact on politics. A large part of the American population feel they have been left behind and probably do not share the view that the US economy is doing just fine.
Will the positive arguments outweigh the negative ones when Americans go to the polls? We will monitor the situation closely.
- The Purchasing Managers’ Index is based on surveys of purchasing managers. A figure of more than 50 indicates managers expect economic expansion and a figure of less than 50 indicates they expect contraction.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.