- Politics is blinding some people to the strong U.S. economy.
- Manufacturing is starting to show signs of bottoming out.
- The economy could be going from deceleration to acceleration.
In our polarized political environment, people’s perceptions of the economy are increasingly shaped by who is in power. This reflex is understandable. The chart below from Pew Research shows how Republicans’ economic assessment surges under Republican presidents, and Democrats’ perceptions remain muted even under today’s bull market conditions.
Evidence Over Partisanship
This flipped under President Obama. Republicans’ enthusiasm for the economy trended higher at a slower rate than Democrats. This was despite an eight-year bull market in asset prices and steady improvements in the labor market. Views about the economy translate into people’s decisions to start businesses, make major purchases, and enter or leave the workforce. For businesses, it translates into hiring and investment decisions.
Ultimately, this is a mistake. There have been brutal bear markets and spectacular bull markets under all combinations of executive and legislative leadership. While it’s inconvenient for political narratives, economic outcomes are shaped by much larger forces than politics. Demographics, the business cycle, technological trends and global economic conditions all play a role. Politics certainly has an impact in shaping these forces in the long-term.
But in the short-term, the impact is primarily psychological. For example, despite vast differences in opinions about how government should work, the Trump and Obama economies are quite similar. Nominal GDP has largely fluctuated between 2% and 4% under both presidents with a brief pop to 5% following Trump’s tax cuts.
Strong U.S. Economy Despite Headwinds
Currently, growth is slowing. It’s reasonable to expect a further drop in backward-looking GDP figures given the trade war. Uncertainty from the trade war is affecting business investment. Many people are convinced that this slowdown indicates that a recession is looming.
Some on the Left and in the media are taking this position as it validates their negative views of President Trump. This is reminiscent of conservatives constantly calling for a recession, economic collapse, or hyperinflation during President Obama’s tenure.
Those who are feeling negative about the economy should understand that the slowdown in manufacturing has been going on now for more than a year. In response, stocks connected to the global economy have been punished, and interest rates have collapsed. It’s now clear that while the manufacturing slowdown has been accelerating for certain regions and industries, it has been more than offset by the increase in economic activity from lower interest rates.
Recent payroll reports have been remarkably strong with positive revisions to earlier months. The chart above shows job growth remains positive despite an uneven 2019.
This strength in the labor market is more consistent with an economy in slow-growth mode rather than on the verge of a recession. Forward-looking indicators like unemployment claims and temporary jobs are also not showing any warning signs. In prior recessions, both indicators showed deterioration well before a recession.
Despite the trade war, consumer spending is at an all-time high. Stocks that are connected to the consumer like Walmart, Target and Home Depot are making new highs. Leading indicators of consumer spending are also strong. For example, trucking activity just hit a new high, and gasoline demand is off-the-charts.
Housing has been the biggest beneficiary of the drop in interest rates. Lower mortgage rates increase affordability and demand. Inventories remain at low levels, supporting the market on the downside. Homebuilders and stocks connected to the housing industry have been leading on the upside. The strength in housing is illustrative since the sector is cyclical yet disconnected from the global economy.
Animal Spirits Returning
Overall, these measures show the economy’s resilience. It has maintained growth despite recessionary conditions in manufacturing. In recent weeks, there has been positive news flow in regards to the trade war with the possibility of tariffs being lifted as part of a ‘Phase 1’ agreement. Leading indicators also show that manufacturing may be bottoming.
New orders have turned around, and inventories are at a two-year low. Before the imposition of tariffs, there was a burst in activity. Expect a similar surge once an trade agreement is reached. If manufacturing were to turn, it would mark the return of accelerating economic growth in the U.S .economy like 2017 or early 2018. The recent strength in stocks may be anticipating such a development.
These periods are great for people to improve their economic fortunes whether it’s to start a business, ask for a raise or find a better job. Unfortunately due to politics, many will not be able to take advantage of these conditions.