From CEPR
When I was growing up, there was a cartoon character named "Mr. Magoo." Mr. Magoo was a sweet old man who was distinguished by the fact that he was almost blind. This led him into all sorts of absurd situations, like having conversations with couches or driving off open drawbridges. He was always saved from disaster by unlikely coincidences, like a ship passing directly under the open drawbridge which allowed his moving car to be safely deposited on the opposite shore without Mr. Magoo ever noticing the problem.
Donald Trump can be thought of as a less benevolent version of Mr. Magoo. For all his offensive comments and mean-spirited policies, it's obvious that much of the time he really has no clue about what is going on. It is difficult to explain many of his actions any other way.
For example, the attendance at his inauguration was noticeably sparse. This is hardly a big deal. It was bad weather and many of his enthusiastic working-class supporters probably didn't have the money to make the trip to Washington.
But rather than say he was happy that many of his supporters were able to come in person and that others were able to watch on television, he insisted on absurdly arguing that it was the biggest inaugural crowd ever. We got another example of this Magoo-like behavior last week when he appeared to claim that the crowd at the World Economic Forum at Davos was bigger than ever because people knew he would be attending.
Trump's Magoo-like behavior carries over to his claims about the economy. He has been touting the low unemployment, the strong job growth, and the healthy GDP growth figures as though these are huge turnarounds from prior years. In fact, by almost every measure, we are merely seeing the continuation of trends from the Obama years.
In the case of job growth, we created an average of 171,000 jobs a month in 2017. That is down from 187,000 a month in 2016 and 226,000 jobs a month in 2015. The unemployment rate was down to 4.1 percent at the end of 2017, compared to 4.7 percent at the end of 2016. The unemployment rate has been on a consistent downward path since it was at 9.8 percent in November of 2010 (roughly a drop of 0.8 percentage points a year), so the decline in 2017 is simply consistent with the prior pattern.
In the case of real wage growth, there has been a modest deceleration, with the inflation-adjusted hourly wage rising by 0.4 percent from December 2016 to December 2017. That compares to an increase of 0.8 percent in 2016 and 1.8 percent in 2015. This slowing is almost entirely to higher world energy prices. Higher world energy prices are not Trump's fault, but there is nothing here for which he can take credit.
There was a modest uptick in GDP growth, with a rise of 2.6 percent last year, compared to 1.8 percent in 2016 and 2.0 percent in 2015. Nonresidential investment was the major factor in the speedup, growing at a 6.3 percent rate in 2017, compared to just 0.7 percent in 2016, and 0.3 percent in 2015.
While the Trump administration might want to attribute this uptick in investment to America being great again, the data tell a different story. The pickup in investment spending was almost entirely due to increased spending on oil and gas drilling. This in turn is most easily explained by the jump in world energy prices. If we pull out the energy sector, investment in 2017 grew at much the same rate as it did in the last three years.
As far as the Trump tax cut, it is still too early to assess the response, but so far it doesn't look we will see the promised investment boom. New orders for investment goods actually slipped slightly in December, coming in 0.1 percent below their November level. If companies really are as responsive to tax rates as the Trump administration claims, they should have had plans that were ready to go as soon as it was clear that tax cuts would be approved. Since passage of the tax cut was fairly certain by the middle of last month, at least some companies should have been able to get their orders in before the end of December. The data indicate there was no such rush.
In spite of Trump's get-tough rhetoric on trade, the trade deficit actually rose by $50 billion in 2017 to $571 billion. It now stands at just under 3.0 percent of GDP.
In short, there is little evidence that anything Trump has done to date has led to a notable boost to the economy. Nonetheless, the economy is looking pretty good, at least by the standards of the last 45 years. With the exception of the year 2000, the unemployment rate has not been this low since the early 1970s.
Real wages have been rising for the last three years, the only time this has been the case since the early 1970s, also with the exception of the late 1990s. And the biggest gains during this period have gone to those at the bottom of the wage ladder. In the last three years, earnings for the median worker have risen by 5.3 percent. Earnings for workers at the 25th percentile (a worker who earns more than 25 percent of workers and less than 75 percent) have risen 7.1 percent, and by 5.0 percent at the 10th percentile.
There is also some evidence that the tighter labor market is leading to stronger productivity growth as firms attempt to use labor more efficiently. Productivity grew at more than a 3.0 percent annual rate in the third-quarter, compared to growth at less than a 1.0 percent rate in the prior five years. We will need more data to determine if we are on a faster productivity trend path. It's a huge deal if we are, since faster productivity growth will allow much faster growth in wages and improvements in living standards.
Donald Trump will undoubtedly continue to boast about his great economy. He is right about the economy looking comparatively good, but the credit belongs to Federal Reserve Board Chair Janet Yellen and President Obama, not to Mr. Magoo in the White House.
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