Trump Should Give Thanks, Not Take Credit, for Economic Growth

By Greg Ip Features Dow Jones Newswires

In the year since Donald Trump was elected president, the economy and markets have been on a roll. Stocks have set one record after another, unemployment has dropped sharply and the U.S. enjoyed its strongest six months of economic growth since 2014.

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Mr. Trump thinks he knows why: "The reason our stock market is so successful is because of me," he declared earlier this week.

But Mr. Trump should be giving thanks, not taking credit. The entire global economy is picking up steam, and foreign stocks are outperforming American markets. This suggests the U.S.'s good fortune is due less to Mr. Trump's presence than to a broader, global trend. Years of highly stimulative monetary policies by central banks have finally overcome various postcrisis headwinds holding back growth.

So Mr. Trump is a lucky man. The question is, can he make his luck last? That will require translating what may be a short-lived upswing into permanently faster growth, and as the fight over U.S. tax cuts demonstrates, those prospects remain elusive.

The disappointing pace of global growth over the past decade reflects both structural drags such as aging populations and the headwinds that followed the U.S. financial crisis in 2008 and Europe's sovereign debt crisis in 2012. Central bankers responded to both with bond buying and zero interest rates.

That monetary medicine circulated slowly because banks were focused on working through their bad loans and complying with new rules rather than lending. The process was over in the U.S. and still under way in Europe when another shock hit in 2015: a collapse in the price of oil and an abrupt slowing in China.

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Ethan Harris of Bank of AmericaMerrill Lynch notes in a recent report that monthly business activity indexes in the U.S. and globally bottomed out in February 2016, and have been rising since. He says growth in China, the eurozone and Japan this year has exceeded both economists' expectations and those countries' long-term potential growth rates.

The markets mirror this pattern. Blue chip shares are up 21% in the U.S. since election day last year, 22% in France, 28% in Germany, 34% in Japan and 26% in emerging markets.

Of course, global growth and markets have always been linked, through trade and investor attitudes. Sometimes that's because the rest of the world is hitching a ride on a U.S. boom.

This time, though, there's a better case the reverse is happening. Japanese and European growth this year has been driven heavily by consumer spending and business investment, not exports.

The stock market initially soared after Mr. Trump's election as investors justifiably anticipated looser regulation, especially of banks, and lower taxes. Yet with time, the "Trump trade" has faded.

A basket of stocks tracked by Goldman Sachs of the highest-taxed companies outpaced the overall market for the first month after the election and has since underperformed; it's up 17% in the past year, less than the total market. Goldman says that's because multinationals, which tend to have the lowest tax rates, also benefit most from the lower dollar.

So why is the market up so much? The overall economy "was better than markets realized this time last year," says Charles Himmelberg, Goldman's co-chief markets economist. "It was a little bit of a happy coincidence that markets started to fully price the strength of that macro data when Trump got elected."

So Mr. Trump has been lucky. Still, successful presidents make their own luck, which is why Mr. Trump last week nominated Federal Reserve governor Jerome Powell to take over from Janet Yellen when her term as central bank chairwoman ends in February. Short of reappointing Ms. Yellen, it was the closest he could come to maintaining her strategy of raising interest rates gradually and cautiously.

Mr. Trump has promised to return the U.S. to sustained 3% growth through less heavy handed regulation and lower taxes, to encourage capital spending and innovation, and renegotiated trade agreements. His officials were proud to note the economy hit that annualized rate in the second and third quarters of this year.

The problem is that pace of growth isn't sustainable. It required employers to add so many more workers that the unemployment rate dropped 0.4 percentage point. Keep that up and the labor market is going to run out of people.

That would finally make the Fed nervous enough about inflationary pressure to pick up the pace of interest rate increases, withdrawing the monetary medicine that got the current global upswing started.

Write to Greg Ip at greg.ip@wsj.com

(END) Dow Jones Newswires

November 08, 2017 11:36 ET (16:36 GMT)