The U.S. economy has performed well in the year since President Donald Trump was inaugurated.
The unemployment rate was 4.8 percent in January 2017 and 4.1 percent in December 2017. Unemployment among black Americans has fallen to its lowest rate in the 45 years that regular statistics have been kept. GDP growth rates were announced above 3 percent in the second and third quarter of 2017, and early signs suggest it was that high in the fourth quarter, too. Stock market indexes have surged.
The new year has also brought a wave of economic good-news stories in the business press. Business investment spending is on the rise. According to surveys of factory managers, U.S. manufacturing in 2017 had its best year since 2004. News sources not known to be overly friendly to the Trump administration, like the New York Times, are reporting stories like “The Trump Effect: Business, Anticipating Less Regulation, Loosens Purse Strings.”
How much credit does Trump deserve for this showing? The president’s critics point out that an enormous economy like the United States’ has considerable momentum, and that the effect of presidents on the economy is often overrated. I agree.
But the observation that a U.S. president has only a modest effect on the economy during a first year of office often includes a heavy dose of partisan bias.
Maybe I missed it, but after Trump had been elected and was headed toward taking office in January 2017, I didn’t hear a lot of his critics say: “Well, the U.S. economy is likely to have a strong year in 2017, but when it happens, Trump won’t deserve any credit.”
Instead, there were predictions of grave difficulties ahead.
If the U.S. economy had headed south early in 2017, I strongly suspect that Trump critics would be placing the blame on Trump’s election. (And in that case, Republicans and Trump sympathizers would be arguing that the new president had inherited an unexpectedly poor situation and should receive essentially zero blame.)
It’s interesting to reflect on previous presidencies and apply the standard of “a president cannot deserve credit or blame for what happens in the first year, because what happens (good or bad) is largely about what they inherited.”
For example, the Great Recession ended in June 2009 — six months into President Barack Obama’s first term. By the zero-credit standard, the exit from the Great Recession should be attributed to the economy and policies Obama inherited from the George W. Bush administration.
The previous recession, in 2001, arrived in March of that year, two months after Bush assumed office. By the zero-responsibility standard, that recession should be attributed to the economy and policies Bush inherited from the Bill Clinton administration.
The incoming Clinton administration, back in 1993, inherited a falling unemployment rate, which by this standard should be attributed to the outgoing George H.W. Bush administration.
I’m sympathetic to the argument that the first year of any presidency is essentially inherited. But this only sharpens the question of why the U.S. economy performed so well in 2017. I’d suggest three possibilities.
First, the election campaign of 2016 seemed to involve all the candidates talking down the economy. But the national unemployment rate had fallen to 5 percent as far back as September 2015, and has stayed at or below that level since. Quarterly growth rates in 2017 were fine, but they don’t really stand out from a number of quarters since about 2010. Also, growth across the main sectors of the economy had been quite balanced, rather than tilted toward a sector like housing or high-tech in a way that can lead to instability.
In short, the U.S. economy did already have considerable forward momentum heading into 2017.
Second, the American economy is tied into the global economy. A just-released World Bank report argues that 10 years after the Great Recession, the global economy is at last producing at its full potential. With unemployment rates falling and stock markets rising in many countries around the world during 2017, it suggests that the reasons for good news are patterns that cross many countries, not specific national actions.
My own sense is that many firms and banks had been holding back for a few years, waiting to be sure the carnage of the Great Recession was over — and now they are stepping up.
Third, the Trump presidency does feel to me like an inflection point. The Trump administration’s two main economic policy changes in 2017 involve a much more hands-off regulatory environment and the recently passed tax bill. Whatever the merits of these changes (and I have concerns about both), it’s not possible that their effects would have been directly felt early in 2017. Instead, firms would need to be reacting to the expectation of an improved business climate in the future.
Like a lot of economists, I mistrust using “business climate” or “business confidence” as an explanation, because it’s based on survey data, not on observed prices and quantities. But just because something is hard to measure doesn’t mean it isn’t real. It’s certainly possible that firms in a number of industries felt in 2016 that the U.S. business climate was not supportive, and interpreted Trump’s election as a sign that policies more likely to support profit-seeking firms were on their way.
Some of Trump’s most important policy steps may also be ones not taken. There were concerns that Trump might trigger a trade war. But while he has been hostile to additional trade agreements (as were the main Democratic Party contenders for president in 2016), he did little to impede trade in 2017. Last week, Trump did impose tariffs on imports of solar panels and washing machines, but protectionism for a few targeted industries is (unfortunately) normal. President Obama, for example, imposed tariffs on imports of tires, steel and other products at various times.
The selection of the next chair of the Federal Reserve defused another worry. There had been worries that Trump might replace Federal Reserve Chairwoman Janet Yellen with someone who didn’t have the necessary trust and connections in financial markets, but his choice of Jerome Powell calmed those concerns.
There’s an old line commonly attributed to John Naisbitt that “leadership involves finding a parade and getting in front of it.” Politicians often excel at this kind of leadership. In that spirit, I don’t blame Trump for claiming excessive credit for the good news of the U.S. economy in 2017. When it comes to economic outcomes, presidents are a bit like the coaches of professional sports teams — that is, they often get an outsized share of the credit for success and of the blame for failure.
Timothy Taylor is managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul. A longer version of this article appears on his blog at conversableeconomist.blogspot.com.