January 30, 2018 11:30AM

State Of The Economy

Bloomberg has a good piece on the US economy under President Trump. Headline takeaway: on almost all metrics, the economy has improved or remained largely unchanged since he took office.

From Q4 2016 to Q4 2017:

-       GDP grew by 2.5 percent, the fastest annual increase since Q4 2015, and higher than the post-recession average of 2.2 percent.

-       Real nonresidential investment increased by 6.3 percent, higher than the post-recession average of 4.8 percent and after falling in three of four quarters in 2016.

-       The unemployment rate fell from 4.7 to 4.1 percent, and is now its lowest since 2000.

-       The unemployment rate for black and African-American workers fell to 6.8 percent, the lowest rate in the 45 years of recorded statistics.

-       The 25-54 civilian labor force participation rate crept up from 81.4 percent to 81.9 percent.

-       Labor productivity grew by 1.5 percent, historically below the 2.1 percent post-war annual average, but above the post-crisis 1 percent average.

The only really disappointing indicators for the President have been:

-       A fall in real median weekly earnings (official statistics show a 1.1 percent increase to Q3 2017 but a large fall in Q4, such that there has now been a 1.1 percent decline overall)

-       A widening budget deficit to 3.4 percent of GDP.

(Note: Bloomberg also chalks up an increase in manufacturing jobs as a “win”, but which sectors jobs come in should not concern us in a free economy. Nor should the trade deficit, the outlook for which it reports is moving in the “wrong direction.”)

Expect the President to herald the economic performance in his State of the Union speech tonight then. And with good reason – there’s lots of positive economic news.

Critics will claim most of the above represent cyclical improvements unrelated to policy. But we know from history bad policy can seriously derail growth prospects (especially temporarily). Why else would so many economists have warned of the consequences of a Trump victory?

The Trump administration have avoided major mistakes. There’s good reason to think the President’s direct deregulatory efforts coupled with slowing new regulations to a halt has enhanced business certainty and the productive capacity of the economy. Fears of severe trade shocks have not (yet) materialized. And perhaps most importantly, the administration has recognized the key challenge moving forward: with the labor market nearing full employment, robust growth and higher wages will only come primarily from an enhanced sustainable growth rate driven by productivity improvements.

The tax reform package’s central features - the cut in the corporate tax rate to 21 percent and immediate expensing on equipment - were designed explicitly to enhance investment to achieve this. The cutting of marginal income tax rates for most should likewise both enhance labor supply while also encouraging human capital accumulation at the margin. While I have concerns about other elements of the package, infrastructure reform which speeds up or lower the cost of economic projects could have beneficial supply-side consequences too.

Sure, there are always economic and policy risks and long-term challenges, some of which are more serious than others. A NAFTA unwinding in 2018 could cause a negative supply-side shock. An immigration package which slashes legal migrant numbers could reduce GDP and blow a hole in the public finances. In the longer-term, it would probably reduce GDP per capita too, through dampening specialization and job matching. Faulty expectations about long-term growth and wealth effects from high net worth could lead to a negative adjustment if there are downward asset price movements. And the US’s public finances are still on an unsustainable path.

But all in all the President’s first year has a positive economic story. And whether you agree with their exact prescriptions, the administration’s focus on raising productivity is the right one.