Who says President Trump refuses to accept responsibility for anything? Just last week, he bravely accepted responsibility for the soaring stock market and the good news emerging about the US economy, which grew at an annual rate of 2.6% — more than double the anaemic first-quarter rate of 1.2%. Also, 209,000 jobs were added in July, bringing the monthly average for the year to 184,000. “I have only just started,” immediately claimed the commander-in-tweet, who believes his rollback of the regulatory state is responsible for healthy job creation.
Not bad for the six months since Trump made the White House his working-week home. But not enough to satisfy him. “We’re going to be higher than 3% in the not-too-distant future,” he predicted. The Federal Reserve Board’s forecast of 2017 growth, at 2.1%-2.2%, is not for the president.
“Beware the Ides of September, Mr President. You own any reversal
As measured by the S&P 500 index, share prices have jumped 15% to record levels since Trump sent Hillary Clinton into temporary retirement. Presidential cheerleading never hurt share prices, but Trump’s support is only one reason investors feel that their exuberance is rational. Another is the profits picture.
Thomson Reuters estimates that by the time all US corporations have reported second-quarter earnings, they will prove to have risen by 11%, after a 15% increase in the first quarter. This is the first year since 2011 in which profits have grown by double digits in consecutive quarters.
The profits picture has been helped by the weak dollar stimulating exports. Also, average hourly earnings in the private sector have risen by 2.5% to $26.36 since last July, enough to enable consumers to step up spending, but not so fast as to bite into earnings. In a welcome change, the weekly pay of the lowest 10% of earners rose faster than that of any other group. And consumers are in reasonably good financial shape. They have kept monthly obligations low by not running up larger credit card and mortgage debt than most can carry. Consumer confidence in both their current and future conditions rose sharply in July. This buoyancy contributed to 3.9% and 6% increases respectively in housing starts and permits issued for future construction this year over 2016. Adding to the cheerful outlook is a recovery in Europe that has higher earnings for America’s multinationals as a by-product.
Advertisement
What makes Trump’s claim for credit for all this good news so brave is that he now owns any reversal. Beware the Ides of September, Mr President. The Stock Trader’s Almanac reports that the September performance of the three leading indices — Dow Jones Industrial Average, S&P 500, Nasdaq — on average is usually the poorest of any month.
Listen closely and you hear the sound of not one but two canaries chirping. One is in your local bank. Regulators worry that banks are lending too freely to already highly leveraged companies that establish their creditworthiness with such sleights of hand as adding expected, but as yet unrealised, cost savings to earnings. This, say regulators, is “raising additional supervisory concerns should economic conditions decline”.
The other canary is singing in Detroit. The red-hot auto market is cooling from the rapid pace of the past seven years, which kept economic growth from falling from an unsatisfactory 2% to an intolerable 1% or, dare we say it, slipping into recession. Compared with July 2016, last month’s auto sales were down 7%, and were down across all big brands except Toyota, which is offering record discounts. GM, down 15.5%, Ford down 7.4%, Chrysler down 11%. Foreign brands were also hurt: Honda down 1.2%, Mercedes-Benz down 9.8%, BMW down 14.8%, Jaguar down 6.8%. Rolls-Royce managed a spectacular 33% increase, flogging 100 vehicles compared with 75 last July, but that won’t push up growth.
To prevent sales falling further, auto makers are offering discounts averaging 10% and providing 72-month loans to sub-prime borrowers who will be “under water” (in negative equity) almost the minute they drive off the lot. Santander Consumer, active in the sub-prime market, reports that second-quarter payments on 9.3% of its car loans are overdue by 31-60 days, compared with 7.3% in the first quarter.
Sales slowdowns are causing “temporary” plant closures and layoffs, both likely to accelerate as auto makers cut output to reduce inventories. GM has “temporarily” idled five plants and cut shifts in others; Ford is planning layoffs.
Advertisement
More impediments to faster growth are heading the economy’s way from Washington. The Fed will be tightening monetary policy, probably moving the dollar up and exports down. Republicans’ failure to pass a healthcare bill carries two additional bits of bad news. The first is that soaring insurance premiums — rises of 30% — will bite into consumer buying power and into the profits of firms that provide coverage for their employees. The second is that the $1 trillion in healthcare savings Trump was counting on to fund tax cuts have not materialised. Arcane rules require any budget passed without Democratic votes to be revenue-neutral over a 10-year period. So, no $1 trillion in savings, no $1 trillion in tax cuts — unless those cuts are offset with equivalent tax increases, or conservative Republicans can be persuaded to live with a ballooning budget deficit. Not likely.
Whether Trump is justified in taking an economic victory lap can be debated. That he will take the blame if the past proves not to be prologue cannot. Which would be only fair, especially if he can’t deliver promised tax cuts and an infrastructure programme.
Irwin Stelzer is a business adviser