May 9, 2017
By Dr. Chris Kuehl, PhD
Managing Director – Armada Corporate Intelligence
Thus it began – at least formally. What kind of economic growth does the Trump administration seek and how has that changed over that first 100 days? What kind of shape is the economy as he has settled in – as compared to what other Presidents before him faced? What are the chances his goals will be met and what are the factors that will make accomplishing these goals tough and perhaps even impossible? In the most general terms he inherits an economy that has clearly started to recover from the grinding recession that started in 2008 and it is in far better shape than when Obama took control. It is not as good as the economies of either Reagan or Clinton.
As the term started Trump faced at least three trends that started in 2016 and are expected to be a major factor in the coming year. The expectation for interest rates for most of the last eight years has been that they would stay low. This is a policy that doesn’t have all that much to do with the President and has developed over the course of two Fed Chair terms (Bernanke and Yellen). They rose in December and again in March and the current assessment holds that they will go up at least twice more in the coming year to end up somewhere between 1% and 1.5%. The second development is inflation – mostly driven by higher wages in select sectors. The rate now is finally at 2% at the core level and is expected to continue inching up. Nobody is expecting hyperinflation or anything even close. For now, this level will actually be a good thing and stimulative to a degree. It will also help convince the Fed rate hikes remain a good idea. The third development is the strong dollar and that could be the most vexing of the three. Much has been made of the desire to promote exports and reduce imports but a strong dollar will make that all the more difficult to obtain. Trump broke with decades of tradition by calling for the dollar to be weakened but was immediately contradicted by his Treasury Secretary who reiterated the United States commitment to a strong dollar. Beyond the verbiage it is hard to shift the power of the currency as this depends largely on the actions of the Fed and the overall global demand.
As he developed policies that match the claims and aims of the campaign he has been in better shape than some of those in the past and is facing bigger problems than some of them. Labor force participation is lower than it has been since Gerald Ford was in office. It is now just a little above 62% and at the start of the Obama term it was at just over 66%. At the start of the term for George W. Bush it was over 67% and the two Presidents before Bush presided over an increase in the rate (Clinton and Bush Sr.). This is a complex measure of the workforce as there are many reasons a person may be out of the workforce. The number one factor is retirement and there have been more people ending their work careers than ever – at least 10,000 a day as the Boomers age in their golden years. Regardless of why people are leaving there is an issue with having too few people to fill the jobs that are becoming available as too many of those seeking jobs lack the skills that are in demand.
One of the more challenging tests will involve manufacturing as this was a big part of the campaign and has been a concern for years. The United States has been regaining its status as a manufacturing state for years and never stopped being a dominant player. These gains have largely come at the expense of jobs as robotics and technology has replaced a lot of the people that once worked in these factories and manufacturing facilities. The number of people directly employed in manufacturing has been declining since Eisenhower was in office. It was close to 35% when his term started and was down to a little over 30% when it ended. Every single President since then has presided over a further reduction of the manufacturing workforce and Trump starts with the lowest level yet – around 8% of the total United States workforce. Remember that these are workers that are directly engaged in manufacturing – if you count all those people that work for manufacturing companies the percentage employed is closer to 30%. To increase the number of people working in manufacturing will be a nearly impossible task given the preference for the implementation of technology. Banning imports and restricting where United States companies produce will have a minor impact and could even make the problem worse given that most manufacturing jobs are in small and mid-sized companies.
Manufacturing in the United States seems to be plagued by misnomer and myth and this has been the case for years. Perhaps it is because so few people ever actually see inside a manufacturing facility. For years, the story was that there was no longer a manufacturing sector in the United States although the numbers never bore this out. It has been about 30% of the GDP when one looks at all the people employed by the manufacturers – not just the ones that are running the machines. Today the political emphasis is on manufacturing jobs and there are myths here as well. The political assumption is that companies are ditching United States workers to set up in foreign countries and although this does still happen the biggest issue is the replacing of human workers with machines and import restrictions will have no impact on this. There is perhaps good intent behind the moves that Trump plans to make but there is a good chance for a backfire if there is failure to understand the real issues in manufacturing. A steel import tax will be good for the steel industry but not so good for the users of that imported steel – the manufacturers that Trump wants to see hire more people.
Dr. Christopher Kuehl, PhD is a Managing Director of Armada Corporate Intelligence and one of the co-founders of the company in 1999. He has been Armada’s economic analyst and has worked with a wide variety of private clients and professional associations in the last ten years. He is the Chief Economist for the National Association for Credit Management and is on the Board of Advisors for their global division – Finance, Credit and International Business. He prepares NACM’s monthly Credit Managers Index. He is the Economic Analyst for the Fabricators and Manufacturers Association and writes their bi-weekly publication, Fabrinomics, which details the impact of economic trends on the manufacturer.