There are two clear areas where the economy has improved since President Donald Trump won the election. Photo / AP
There are two clear areas where the economy has improved since President Donald Trump won the election. Photo / AP
The political spin on the economy right now goes like this: Republicans say the United States was in terrible shape until Donald Trump took office and then the economy went from blah to boom.
Democrats say "Thanks, Obama." They argue former president Barack Obama deserves all the credit for pulling the economy out of the Great Recession, and Trump is just riding his coattails, reports the Washington Post.
The reality is somewhere in between.
"Trump was dealt a good hand by Obama, but Trump has also kept the momentum going," says economist Joseph Brusuelas of accounting firm RSM. Brusuelas said he believes it is "juvenile" to have endless debates over who gets credit because "the Federal Reserve and the business cycle have also played large roles in the recovery."
Trump's economic track record in his first year in office looks similar to Obama's final years in office when you look at the key metrics of jobs, growth and wages.
The economy added 2.1 million jobs in 2017, a bit slower than the 2.2 million in 2016 and 2.5 million in 2015. (Given how low unemployment is, economists say any number over 2 million is very healthy at this stage of the recovery).
When it comes to growth, the economy expanded at 2.3 percent last year. That is on par with 1.5 percent growth in 2016, 2.9 percent in 2015 and 2.6 percent in 2014. The stock market, another metric Trump likes to point to, has also been rising steadily since 2009.
As for pay, wages in January were 2.9 percent higher than a year ago, outpacing gains made during the Obama years. It is welcome news, but nonpartisan experts are reminding everyone that one data point is not a trend.
But there are two clear areas where the economy has improved since Trump won the election: Sentiment is up, and business investment is up.
Right or wrong, people feel better about the economy now. It shows in polls: 66 percent rate the economy as "excellent" or "good," according to a recent Quinnipiac poll. It also shows in the data Wall Street follows.
The University of Michigan Consumer Sentiment Index is at a 17-year high, and the NFIB Small Business Optimism Index is at the highest levels since Ronald Reagan was president.
Graphic / Washington Post
The bump in sentiment has yet to trigger a massive rise in spending, but the fact that Americans are saving at the lowest rate since before the financial crisis indicates some people are already consuming at their limits.
What has changed is businesses are opening their wallets. Chief executives are buying more equipment, new computers and software and investing in research.
Business investment (dubbed "nonresidential fixed investment") rose 4.7 percent last year, according to the Bureau of Economic Analysis, a big jump from the year before when business investment was flat.
"Firms think growth is going to pick up. They are feeling more optimistic, and that's why they are investing more today," says Neil Dutta, head of U.S. economics at Renaissance Macro Research.
"The election coincided at the front edge of a cyclical upturn in the global economy. Europe, Japan, Canada, they've all seen growth too," Dutta says.
Ellen Zentner, chief U.S. economist at Morgan Stanley, agrees a lot of the shift in business spending is due to a rebounding world economy, including higher oil prices. "Now we're layering on top of that the recent tax policy changes. It's piling positives on top of positives," she said.
Former U.S. President Barack Obama delivers remarks to the Business Council at the Park Hyatt Hotel May 4, 2010 in Washington, DC. Photo / Getty
Strong momentum at start of 2018
Zentner's team created an index that tracks how much businesses are likely to spend in the coming months. It is called the Capex Plans Index, and it is sitting at an all-time high, the best reading since the index began in 2005.
"It points to an incredible amount of optimism in the new year," she says.
There is a lot of momentum in the U.S. and global economy. The hope is low unemployment will force companies to raise wages as they compete to hire and keep good workers. There is also hope more business spending will lead to more productive factories and offices, and that, too, will propel growth and higher wages. (The economy will also have to adjust to rollbacks on worker protections).
Trump has set a high bar. He and his team say 3 percent growth is a must. Rajeev Dhawan, a noted forecaster and economist from the Georgia State University, says the signs he is seeing are consistent with healthy growth of 2.5 percent or so, but it will be tough to hit the levels Trump wants.
"If you want higher growth, you'll need to have higher capital spending," Dhawan says. "If you want 4 percent growth rates, you need to have Capex almost twice the rate of what we did last quarter."
Business investment was double where it is now in the boom years of the late 1990s, Dhawan notes. He thinks the tax cuts will help encourage investment, but, like many economists, he says presidents usually get too much credit for the economy, whether it is soaring or contracting.
While Democrats have tried to make the case any good economic data is due to Obama, that narrative will likely have to shift in 2018. Now that Republicans have passed a major tax bill, it is the Trump economy now, for better or worse.
For all the debate over the Trump versus Obama economies, two big questions remain: Will wages finally rise above 3 percent? And is America prepared for the robot and artificial intelligence revolution?
"If this were a rational world, we would have presidential commissions and congressional hearings and a profound public debate over the AI economy" says Brusuelas of RSM. "Instead, we just get tit-for-tat over who deserves credit for the latest economic data."
