Opinion | The Trump boom can’t last

Americans have been feeling optimistic about the economy for a while, and the data supports those sentiments. The Bureau of Economic Analysis recently released its initial estimates of growth in real GDP, a broad measure of all production in the economy, for the first quarter in late April — 3.2% growth, good for the third highest mark for a quarter since 2014. Moreover, April’s unemployment rate came down to 3.6%, the lowest since December 1969.

President Donald Trump’s administration and his supporters have gone to great lengths, particularly on Twitter, to remind the rest of the nation of these positive developments — more specifically, an alleged resurgence of manufacturing jobs, an economy beating growth projections and strong consumer and small business confidence. Nevertheless, there is more ambiguity to the situation than most people are aware of, and a deeper look behind the numbers shows other potentially destabilizing factors at play.

One of the arguments used with the objective of bolstering Trump’s economic policies — the growth of manufacturing jobs — is misleading. Manufacturing employment has, in fact, performed well under his administration, but not much better than one would expect given the state of the rest of the economy, and it’s very unlikely that his tariffs — designed to protect American companies from “unfair” Chinese competition — have contributed. Plus, this boomlet, which has occurred after decades of declining manufacturing employment, might not last long.

“Over the long term, it has been true that manufacturing production has stayed roughly the same share of the U.S. economy as in the past, but manufacturing employment has diminished sharply,” Douglas Holtz-Eakin, a former Congressional Budget Office director, said. “That’s the same thing as saying manufacturing has had the best productivity growth. That’s generally considered a good news story, for the record.”

The quantity of goods being manufactured has been expanding for decades and recently reached an all-time high, as Holtz-Eakin says. These two facts seem to point to one explanation for the long-term decline of manufacturing jobs, accepted by economists — the culprit is not American workers having to compete with Chinese employees working for low wages overseas, but improved technology that allows us to produce more with fewer workers. As such, Trump’s tariffs on Chinese goods will hurt consumers and provide almost no boost to domestic business.

If there is anything here to be believed — and much evidence, including some from the President’s advisers themselves, says there is — then no grand bargaining chip in the trade war with China exists.

“Domestic producers also stand to benefit from price increases supported by tariff protections,” the Council of Economic Advisers wrote in its annual Economic Report of the President. “Offsetting these benefits are the costs paid by consumers in the form of higher prices and reduced consumption.”

Long story short, much of the cost of the tariff will simply be borne by consumers in the form of higher prices. Making matters worse, some of those burdened will be American businesses — exactly those that the tariffs were intended to help.

It’s not just Trump’s tariffs that have caused backlash against him. He has further come under fire from the media for controversial picks for the Federal Reserve, the nation’s central bank — Stephen Moore, a 2016 Trump campaign adviser, and Herman Cain, a 2012 GOP presidential primary candidate and former pizza executive. The two have been criticized as inexperienced and motivated by politics, possibly seeking to lower interest rates and stimulate the economy in the short-term to help Trump win re-election, and have since declined their nominations.

Trump previously condemned the Fed for slowing down U.S. growth through higher interest rates, which is problematic, as central banks are usually granted a degree of independence from the government, so that its decisions are made on the basis of economic rather than political merit. Surprisingly, Trump is partially right about monetary policy having been too tight, exposing the flaws with the Phillips Curve model the Fed uses to predict inflation — though his crude attacks are still unwise.

The Phillips Curve is a simple framework that posits a tradeoff between unemployment and inflation. When unemployment is low, companies have to raise wages and pay more for materials in order to obtain workers and supplies, so inflation rises. Conversely, inflation falls — and even goes negative — when unemployment is high. Today, inflation barely moves, in spite of a return to low unemployment and nearly 10 consecutive years of job gains. There is no reason to raise interest rates with inflation barely reaching the 2% threshold being targeted.

It’s very hard for households and businesses to plan for the future when prices are unpredictable, and periods where the price level falls or rises rapidly are usually periods of economic turmoil. Monetary policy thus matters a great deal because, if done correctly, it can bring about price stability. It also drives bond and stock markets, which have historically powerful predictive abilities.

“Something that commonly gets attention in the markets is an inverted yield curve,” Simon Moore said in Forbes. “This is where short-term yields exceed longer term yields and so the term spread becomes negative. If this is the case, then the bond market is potentially betting on interest rates declining, and it’s often right.”

Each of the last three yield curve inversions were followed by recessions within one to three years — so it’s significant that the yield curve today is nearly flat, risking a possible inversion. In the short run, there are definitely reasons to worry.

The last three years of consistent expansion and a return to full employment have Trump and many Republicans hoping that economic tailwinds can push them to another victory in the 2020 elections. They were handed a boost in that goal from a somewhat unlikely source recently, as 58% of likely voters — a group whose majority have been shown to disapprove of Trump’s presidency as a whole — approved of Trump’s handling of the economy in a survey taken in April by the Georgetown Institute of Politics and Public Service.

Still, mixed signals are popping up everywhere. The unemployment and GDP numbers are solid, but an escalating trade war could mean a big financial hit to consumers and businesses down the line and may be hurting growth already, forecasting a possible slowdown — even without the danger of an imminent economic contraction. Bond markets indicate that investors are, at the very least, underwhelmed by the whole situation. Given the uncertainty, it would be wise to hold a skeptical outlook for the near future.