Where Trump Sees Economic ‘Disaster,’ Experts See Something More Complex

2017-01-06 02:12:21

 

Where Trump Sees Economic ‘Disaster,’ Experts See Something More Complex

President-elect Donald J. Trump has called the American economy a “disaster.” But in Sioux Falls, S.D., Scott Lawrence, a local businessman and Trump voter, has a different take.

“Businesses that were hunkered down earlier in the year have come on strong,” said Mr. Lawrence, who runs a local advertising firm, Lawrence & Schiller, which employs 95 people. “I’m definitely more optimistic than I was six months ago.”

Mr. Lawrence is putting his money where his mouth is: His company hired five employees late last year, including digital strategists and content designers, and he plans to add another four in the next three months.

Although Mr. Trump was able to capture the White House by portraying an American economy in shambles, many of the economic fundamentals are solid.

The economy added an average of 180,000 jobs per month between January and November 2016, with a full year’s reading due on Friday. The unemployment rate fell to 4.6 percent, the healthiest reading since before the Great Recession.

To be sure, there are some very real shortcomings that Mr. Trump identified in his campaign. They include minimal pay growth for less-skilled workers, near-record numbers of Americans not in the labor force, and disappearing factory jobs. Still, many mainstream economists say that the Trump agenda — aimed at lowering taxes, peeling back regulations and reopening trade deals — will not alter those trend lines.

“Tax cuts are unlikely to boost labor participation rates, nor will they reverse the aging of the population,” said Michael Gapen, chief United States economist at Barclays. “Less regulation could have a positive impact on long-term growth, but it is unlikely to move the needle over the next two years.”

Many low-wage workers are getting a break in the new year through something seen as anathema to traditional Republican policies: government regulation. Nineteen states increased their minimum wages as of Jan. 1, with Arizona, Washington and Maine raising the floor by $1.50 or more.

Even in states where the wage gain is not as steep, like California, with its 50-cent-an-hour increase, one in 10 workers has gotten a raise. As on many issues, Mr. Trump has sent conflicting signals on this subject, suggesting at times during the campaign that state increases were justified, but warning in primary debates that wages were “too high.”

Whatever Mr. Trump eventually decides on the minimum wage, his economic plans may produce mixed results at best for his blue-collar, Rust Belt base.

Protectionist trade policies, Mr. Gapen said, will produce losers as well as winners, meaning upheaval for many industries and workers rather than a suddenly improved trajectory for growth and employment over all.

At the same time, while Mr. Trump’s proposed tax cuts could give the economy a lift as measured by gross domestic product — a prospect that has buoyed Wall Street — the benefits are likely to flow to the group that has prospered the most during the recovery under President Obama: the wealthiest 10 percent or so of households.

Indeed, as a business owner, Mr. Lawrence is thrilled at the prospect of tax cuts. “In terms of Trump, I voted for the platform as much as the individual,” he said. “Paying less in taxes enables me to invest in my business.”

That filters down to individual decisions about hires and investment. But while the positions Mr. Lawrence is filling are middle-class jobs in Sioux Falls — they start at $45,000 to $50,000 a year, plus benefits — all require a college degree or other technical training.

Helping workers who lack a college degree — among Mr. Trump’s strongest supporters, and roughly 60 percent of the American work force — is much harder.

Economists like Nariman Behravesh of IHS Markit, who says Mr. Trump’s proposals could raise growth meaningfully in the next two years, acknowledge this quandary.

“Stronger growth will help with the low participation rate, but what it’s not going to do is help workers who have been left behind by a lack of education or training,” Mr. Behravesh said.

That’s especially true in the factory sector, which is likely to employ more highly skilled workers in the future, albeit in smaller numbers than in the past.

“This is where I have trouble with Trump,” Mr. Behravesh said. “A lot of those manufacturing jobs are gone forever. He is raising expectations, but it’s not going to work. Even if they don’t go to Mexico, a lot of jobs will be automated out of existence.”

The ultimate impact of whatever Mr. Trump proposes and Congress approves will depend on whether the result is heavier on tax cuts and infrastructure spending or protectionist measures like higher tariffs, economists say.

In any case, tax cuts and infrastructure spending plans are likely to be whittled down in Congress, especially if deficit hawks return to the fore. At the same time, rising interest rates and a stronger dollar will serve as a headwind no matter what comes out of Washington.

The biggest economic danger under Mr. Trump comes from tariffs and other protectionist steps, especially if they provoke a response from the likes of China and Mexico. And unlike taxes and spending, where congressional action is necessary, with tariffs the administration has considerable latitude to impose them on countries it labels as unfair trading partners or currency manipulators.

“You can make a case for leveling the playing field,” Mr. Gapen said. “But the trade-off is more expensive goods for consumers.”

For his part, Mr. Behravesh is looking for the economy to grow by 2.3 percent this year, up from an estimated 1.6 percent annual pace last year. Growth could reach 2.6 percent or higher in 2018, but is very unlikely to hit the target of 4 percent growth that Mr. Trump outlined during the campaign.

“I could be convinced on 3 percent, but you can’t get there in this environment,” Mr. Behravesh said.

Wherever growth ends up, the economy seems to have a feast-or-famine quality, which explains the disconnect between Mr. Trump’s portrayal of conditions and that of Mr. Lawrence, the Trump supporter who is hiring in Sioux Falls.

Nationally, the white-collar professional and business services sector, which includes advertising firms like Mr. Lawrence’s, has added more than a million jobs in the last two years.

Education and health care employment is up by a similar amount, and construction is showing signs of life.

Manufacturing, on the other hand, has struggled, hurt by the strong dollar, automation and the continuing shift of production to cheaper overseas locales, which Mr. Trump has made a signature issue. Over the last two years, factories have shed 51,000 workers.

Still, many of the states where recovery from the recession was slowest have gained ground more recently. Rhode Island’s unemployment rate in the summer of 2009 was among the highest in the country at 11.3 percent, with huge losses recorded in the manufacturing sector.

Now Rhode Island is benefiting from the opening of technology centers by General Electric, Johnson & Johnson and Virgin Pulse, part of Sir Richard Branson’s Virgin empire. The state’s rate has been more than halved, to 5.3 percent.

“We’re approaching the national average, which is a real accomplishment given Rhode Island’s history,” said Stefan Pryor, the state’s secretary of commerce.

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