The great disparity: US economy booms amid political chaos

The US economy continues to excel, sure there are plenty of clouds on the horizon, but for me, the great puzzle is how the US economy can boom like it is, while Washington remains in such chaos.

Article updated: 9 November 2018 9:00am Author: Michael Baxter

The US midterms provided no surprises, they pretty much went as opinion polls projected. You can look at it in one of two ways:

  • Trump has pulled off another miracle, with Republicans holding the US Senate, against the run of history, when midterms usually work against the President.
  • Trump has suffered an extraordinary disaster, Republicans have lost control of the House of Representatives, despite the booming economy. If Trump can’t win when the economy is booming, what will happen if the economy slows?

US economy

The latest purchasing managers (PMIs) from ISM, tracking the US economy in October, point to a mild slow down, but only from a very rapid pace. The PMI tracking US manufacturing fell from 59.8, an exceptionally high level, to 57.7, which is still pretty good. The PMI tracking non manufacturing fell from 61.6 — an extraordinarily high reading — to 60.3, merely exceptionally high. Based on the past relationship between the PMIs and the US economy, annualised GDP should be growing at around five per cent. To put that in context, in the latest quarter, Eurozone quarterly growth was 0.2 per cent.

The US economy is the star of the developed world.

Disconnect

Everywhere, I read that the Trump-voting US public say they don’t especially like the man, but they are fed up and want to see change.

To be clear, the current US boom is a logical extension of the recovery that began under Obama. Indeed, during the last 18 months of the Obama presidency, this column frequently predicted a US boom.

Yet, it seems to me that US politics is in chaos. The division in US society so great; with the two sides seemingly drawing ever further apart, I would not be surprised to see the US split apart within 20 years, after a rekindling of the kind of divisions we saw pre the US Civil War — I know that sounds extreme, but really, US unity seems to be in the process of being torn asunder. Such political animosity has to be very dangerous.

Yet the economy booms and the markets do okay — anyone would think that there is no link.

Midterms

Capital Economics reckons the result of the US midterms will be pretty neutral. Andrew Hunter, US Economist, at Capital Economics said: “Overall, the midterms are unlikely to have a significant bearing on the economy. But they probably raise the risk that political uncertainty once again becomes the dominant theme over the next couple of years.”

His view is that we may see legislative gridlock, just like we did under Obama, but then that didn’t do the economy much harm. Trump’s protectionist agenda won’t be curtailed, further tax cuts are unlikely, but Congress and the President may agree on some kind of fiscal stimulus in the form of infrastructure spending.

Underlying danger

But my sense of déjà vu is still working overtime. Stimulating an economy like Trump has been doing when it is already close to full employment is very dangerous.

The US fiscal deficit is surging at a time when it should be falling — everything is back to front, the time to borrow is when things are tough, if you increase borrowing during the good times what chance do you have when the things are bad?

The US Federal Reserve is suggesting that US interest rates will get close to 3.5 per cent in 2020. By historical standards that is not high, but I am not sure that, with debts so high, the global economy can afford rates that high.

By contrast, Capital Economics is forecasting a sharp slowdown in the US economy in 2020, and that the Fed will cut rates, after peaking at three per cent next year, back down to two per cent in 2020.

If the US economy does slow, I guess Trump will blame Democrats using their House of Representatives majority to block his agenda. The result of the 2020 election will depend on who the electorate believes.

Best hope

The best hope for the US, UK and Eurozone economies lies with the possibility that technologies such as AI and the Internet of Things will boost productivity, without leading to rising unemployment, such that voters forget about their angst, and fears over immigration, and the Deep South and Rust Belt forgets about its hatred of California and New York, and things are all happy again.

You might think that is a naive hope, if you are right, then I have little hope left for economic and even political stability.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

See what else we have to say