On November 8th, 2016, Donald Trump was confirmed as the 45th president of the United States of America. Clearly, an outsider in politics, his win was attributed to campaign promises of economic populism; nothing clear and nothing consistent. From trade protectionism and tax cuts, to infrastructure spending and deregulation, the US economy was somewhat shut down as the era of Trumponomics rolled in. But with three years in, the scorecard is not making for particularly positive reading.
Protectionism has been the highlight of Trumponomics, with the Trump administration seeking to renegotiate trade deals with practically every economic block. Particularly, the confrontation with China has generated trade war headlines for more than two years, with both countries slapping each other with tariffs back and forth. For Trump, the move was necessary for reducing the huge trade deficit between the two nations that is highly tilted in China’s favour. The evidence, though, suggests otherwise; that tariffs are not the answer to resolving trade balance deficits and no one wins at trade wars.
Trump implemented aggressive tax cuts on both wealthy individuals and corporations, with the argument that there would be more business investments, while manufacturing companies would be encouraged to set up shop at home. This, according to Trump, would lead to more jobs in the US and overall economic growth. The result, however, has been the opposite, with businesses using tax gains to invest in stock buyback programs rather than boosting economic activity. This has delivered a clear message to the Trump administration that the tax rate is the least concern when corporations consider business investment in any economy. But why are businesses afraid?
What Does the Future Hold?
CFOs (Chief Financial Officers) across the US have been polled to be at their most pessimistic levels in over three years and Wall Street has keenly noted that the ISM Services survey has showed that 80% of the US economy is slowing down. As well, the dreaded yield curve inversion, the most reliable predictor of recession in the US, has already taken place. The worry is yet to hit the equities market, with the Federal Reserve entering a low rate regime early.
Granted, investors who trade NASDAQ index and S&P 500 have witnessed returns of 24.4x and 19.4x income (respectively) based on profits booked. The numbers make sense in an economic expansion, but during a slowdown, it raises a few flags. Weak economic data, such as decreasing consumer spending and negative business sentiment, suggest that equities are at a peak, waiting for a small trigger to jump over the cliff. How low could they plunge? The benchmark S&P 500 is currently (as of October 2019) trading around 2950 points and conservative valuations of troughs and peaks, using GAAP earnings per share, suggest that the index would be dragged to around 2000 points, which would be a 32% tumble, at the very least.
The only thing going for Trump is the labour market, where the unemployment rate is at record lows. Even so, hiring is slowing down and wage growth is not expanding. As well, the unemployment rate is largely a lagging indicator, with businesses more likely to start cutting jobs in the middle of a slowdown rather than at the start of it. Still, the unemployment rate is not exactly impressive when consumer spending is cooling, which might suggest a general apprehension even on the part of consumers.
Against all parameters, Trumponomics seems to have come short. Tax cuts and simultaneous higher government spending has not breathed life to an economy that was showing all the signs of slowing down; instead, it has only served to increase national debt, which is (arguably) already at astronomical, unsustainable levels. Tariffs have also not magically shifted the negative trade deficit with China. US imports from China have decreased, but only to be replaced with imports from other ‘substitute’ countries, such as Vietnam. As for manufacturing, the tariffs have ended up hitting the US consumer hard. Most US manufacturing companies have seen ‘intermediary’ products hit, with tariffs which has consequently led to higher pricing.
Final Word Trumponomics promised to make the US economy great again, but it has failed the test of time. Its policies have largely been broken and based on populism, rather than evidence-based economics. Yet, the biggest risk of Trumponomics is still uncertainty. In the Trump era, no rules apply, and a policy decision today can be reversed tomorrow haphazardly, even via a tweet.