America’s long-running economic expansion

THERE is often more fakery than truth in a tweet from President Donald Trump. But on one subject he is broadly right. America’s economy is in good shape. Business confidence is high. Jobs are plentiful. Last month non-farm companies added 228,000 workers to their payrolls. The unemployment rate is 4.1%, the lowest figure for more than a decade. The availability of jobs is drawing more of the working-age population into the labour force. Wages are growing in real terms with some of the biggest gains going to low-paid workers.

Mr Trump over-eggs things, of course. He claims each good jobs report and each new peak in the S&P 500 as his own achievement. In fact, he was lucky in his inheritance. The market has risen by 25% since his election, but is up by 195% since 2009. The unemployment rate fell from a peak of 10% to 4.7% under Barack Obama and then to 4.1% on Mr Trump’s watch. His administration says that a mix of deregulation and corporate-tax cuts will spur sustained GDP growth of 3%, well above the 2% average of recent years. As the economy approaches full employment, an astonishing pickup in productivity would be needed to accomplish that.

But Trump-bashers overstate their case, too. They dismiss the optimism of consumers and bosses as sentiment, not substance. They warn that the stockmarket is dangerously overvalued and that America’s expansion, which is in its 102nd month, must soon falter. Yet the economy is not in immediate danger. And the maturity of the business cycle cuts both ways (see article). It makes a nonsense of Mr Trump’s claims to be the author of American economic success. But the economy is also capable of some welcome surprises.

Long in the tooth

America is not the only economy doing well. For about a year, a synchronised global expansion, taking in Europe, Asia and the Americas, has been under way. GDP growth in the euro zone, a region until recently synonymous with economic misery, is around 2.5%, despite slower population growth than America’s. But America stands out because of where it is in the cycle. If it continues in 2018, this expansion will become the country’s second-longest ever.

True, there are perils. As the business cycle matures, there is more chance that the economy will overheat, because of bottlenecks in the jobs market; or that the central bank overtightens in order to prevent things from running too hot. The longer the economy keeps growing, moreover, the more scope there is for financial imbalances, such as excess debt or frothy asset prices, to build up. Some warning signals are flashing. The gap between long-term and short-term interest rates has narrowed, as it tends to before recessions.

Yet the evidence for overheating is thin. Inflation has trended lower this year. Wage growth has picked up a little, thankfully, but shows few signs of accelerating. Pay would have to increase by quite a lot more before rising inflation is a real worry. The proposed tax cuts are paid for by bigger budget deficits, a fiscal stimulus that is ill-timed given the business cycle. But the tax cuts favour companies (which in aggregate are generating bumper profits) or rich individuals (who save more of their income). That means the ripple effects from the stimulus are likely to be small.

The risk that the Federal Reserve tightens too much is aggravated by a change in the make-up of its rate-setting committee, which will take on a more hawkish tinge from next year. Indeed, nothing Mr Trump does is likely to have a bigger effect on the economy than his choices to fill Fed vacancies. But the tightening so far—the Fed raised rates by another quarter of a percentage point this week, to a range of 1.25-1.5%—has been appropriate. As for financial imbalances, pockets of excessive leverage exist. But the stockmarket has reached new highs as real interest rates have fallen: yields have dropped across all asset classes, from property in big cities to junk bonds. Asset prices may be high, but there is a logic to their ascent.

Still has bite

A mature cycle also has pluses. Investment is one. A global upswing in fixed capital spending is already in train, led by America but not confined to it. It is fuelled in part by a drop in uncertainty about the global economy. Businesses that have been reluctant to make long-term bets when one or other of the engines of the world economy has been sputtering are now more willing to put their money to work (see Schumpeter). Investment has also followed a surge in profits, reflecting stronger GDP growth, as it tends to. As workers become scarcer in America’s tightening labour market, firms have a greater incentive to automate.

A second boon of a maturing cycle is higher productivity, which has risen at a snail’s pace in all countries since the global financial crisis. More capital spending by businesses will help. And in America, in particular, firms are under pressure to reorganise their businesses to meet expanding demand, because low unemployment makes it harder to find additional workers. America is not about to return to pre-2005 rates of productivity growth, whatever Mr Trump tweets. But there are tentative signs that the rate is starting to pick up from its dismal, post-crisis slump.

All expansions eventually come to an end. Even if America does not inflict a recession on itself—through ill-judged trade policies, say—a global shock could do the job. When that time comes, America’s policymakers will end up regretting how government revenues were squandered on a badly designed tax cut. The deficits that result will make it politically harder for Congress to agree on a fiscal stimulus to combat the next downturn. Interest rates will in all likelihood peak at much lower levels than in the past, limiting the scope for big cuts to fight a recession. In this, the worrywarts are entirely correct.

But the immediate outlook is sunny. The global upswing is still young, and has momentum. Mr Trump’s policies have lifted the spirits of business leaders, who already had reason to be confident. Galling though it must be to the president’s critics, America’s economy is well placed for 2018.