Well, you can tell people are beginning to feel better about their situation again. The great market debate is coming around again, we’re not just talking about masks/no masks, China Flu or opening the restaurants for indoor dining. The conversation of late is whether the economy is a result of President Trump’s efforts or is this economy just a continuation of the Obama Administration and President Trump is the benefactor of someone else’s efforts? Listening to the “economic experts” on the nightly cable news just adds more confusion and the news commentators shed absolutely NO light on the subject, whatsoever, even though they pontificate endlessly on the subject with the confidence of a PHD candidate.
How is the average person supposed to know if this is a carryover of Obama’s efforts or Trump’s policies, further, does it really matter in the grand scheme? First off, yes it really does matter because the underlying philosophy of the two administrations are so completely different that it’s important to understand how we move forward. The answer to the second part of the question will take a little bit of critical thinking on your part. Looking at this from a layman’s point of view, how do I know if the argument put forth by the “economic expert” is reliable or not? (I use quotes because many so called experts are interviewed because they express a theory that advances the interviewer’s point of view but does not advance any real discussion). Since most of the time real discussion is not taking place the first thing I look at, is there a reasonable argument put forth by this expert or are they just emoting? Dr Paul Roma, (former chief economist of the World Bank, Nobel Memorial Prize winner in Economic Science), would seem to be a legitimate expert in economics and recently he gave an interview in which he said we were in a deep recession, almost depression, which would take considerable time for us to recover from and be a very painful process. On the surface, when you look at some of the economic metrics I can see where a person might interpret the indicators in this way, but as an economist by education, I wanted to hear his argument for this supposed slow recovery, and what policies needed to be implemented to get through this recession. The interviewer then made reference to a couple of officials in the government as a means to get to the answers to these questions and instead of walking us through his argument for a slow painful recovery he dismissed both of the referenced officials as “liars for hire.” He continued on saying he couldn’t care less what their opinion was because, they were intentionally misleading the public by lying about the state of the economy. Here is a perfect example of emotions driving the argument. Dr Roma obviously should be considered an expert, but because his argument devolved into a character assassination I doubt he has a legitimate argument for his case. His argument had devolved to the idea “you should just accept my premise because I’m a former chief economist for the World Bank and a Nobel prize winner”. When it comes to experts, I personally have a very high requirement, namely if you say it you better be able to defend it w/out getting emotional, otherwise don’t waste my time. He clearly did not defend his statement. That’s my first criteria for listening to the so called experts after I’ve determined that “…it really matters in the grand scheme of things”.
So if you don’t have an economics degree and the experts can’t seem to agree about the health of the economy and no one sounds like they are going “off the rails” then how are we supposed to know who’s giving us the straight answer? First off look around, are there a lot of small businesses starting up or are you seeing “going out of business sales,” these are obvious indicators of the health of the economy. Other things to look at, if you hear about declining unemployment rates while businesses permanently close their doors, then something’s not right. If the DOW 30, NASDAQ and the S&P 500 are increasing quarter over quarter, then things are probably getting better. What does all that mean? Those 3 indicators represent a broad spectrum of our economy, from technology in the NASDAQ to arguably the best 30 industrial companies in the US to 500 of the better producing stocks across many sectors in the US economy. All this, local business thriving or not, unemployment rates matching the world around us, improving stock market indicators, stable interest rates, will give you a general sense of what’s happening around you. So, the question of who’s economy this is, Trumps or Obama’s, can be answered a little bit easier. To understand how we will likely be once the Pandemic crisis is over, we need to look at the economy prior to the government shut down in the 1st Quarter of this year. The DOW 30 had reached an all-time high, NASDAQ and the S&P 500 were poised to hit new highs, (which they subsequently did). The unemployment rates had reached all-time lows, coupled with new business startups occurring around the country, as well as in my local neighborhood. All these indicators are easily tracked and suggest we had a strong economy coming into 2020. Is this a result of the Obama Administration or the Trump administration?
When Trump was declared the President Elect on Nov 5, 2016 an interesting thing happened in the Stock Market. As you can see in the chart below, the DOW went from 18,142 in October 2016 to 19,762 in December and by January 2017 it had reached 26,149. This is a remarkable increase over a very narrow time frame as if someone had released a pressure valve and let the market reach a new point of equilibrium. To this point Trump had only talked about what he was going to do and obviously hadn’t done anything yet. Remember the market is always forward looking and it was looking forward to what Trump said he was going to do. He promised to reduce regulations on companies, renegotiate foreign trade deals and bring the jobs back to the US, these 3 issues alone would generate more value which is what the market anticipated. If Trump had failed to deliver, the market would have reacted and fallen back to its previous levels but instead, as Trump followed through on his commitments the market continued to climb to a new record of 29,568 in February 2020. This begins to answer the question of whether this is Trumps economy or Obama’s economy.
To continue answering this question ask yourself, what happened in 2009 when Obama took office? The first thing I noticed was, unlike Bush in 11/04 or Trump in 11/16 the DOW continued down in 11/08 with no hint of improving until 03/09. The economy was in a small recession and like the election of Trump, the forward looking DOW reacted to what it anticipated would happen with the Obama administration, it continued downward for a time, from 8,829 in Nov 2008 to 7,062 in Feb 2009. The policies Obama had talked about in the runup to the general election were expensive propositions and would weaken the economy by taking money out of the market for big government programs. The market reacted to this and continued downward until March with the announcement of additional funds being pumped into the market to build it up. The Obama administration had indicated it would raise taxes, increase regulations and embrace the Paris Climate accord; all expensive programs designed to remove value from the marketplace and redistribute it elsewhere. The infusion of cash helped along with a marketing campaign intended to tell everyone the economy was good. The marketing campaign included modifying the way the unemployment rate is calculated so that if anyone was unemployed long enough, they were no longer counted. This made it possible to report a declining unemployment rate even though the labor force participation rate was also increasing. Think about it, if everyone is truly employed the participation rate will increase, but instead you can see in the next chart, job participation rate drops right along with the unemployment rate. Very Curious!!!
Another good indicator of a strong economy is the GDP. This is in the news a lot lately and we’re seeing numbers in the 2-4% Q over Q range, which means the economy is growing and more value is being generated. There’ve been only 3 quarters between 2017 and the end of 2019 where the growth dropped below 2. In comparison, from the time the Obama administration took over until Trump the chart below illustrates the volatility in the economy. After the DOW had climbed to roughly 11,500 from its low of 7,062, the GDP growth went from 2% to a -1% back up to 2.9% in three quarters. It’s difficult to grow an economy when the quarter over quarter growth is so erratic. It’s difficult to grow when you fall back 2 steps, it then takes 3 steps forward to recover. The question it makes me ask is what is causing such a change and if you’re always making up for the previous quarter can the economy grow and produce jobs. As we’ve seen from the job growth, or lack thereof, anyone who is not already wealthy does not benefit from this type of economy, but the wealthy will continue to benefit regardless.
Was the economy terrible under the Obama Administration? For some of us, not so good, the job participation rate dropping tells us there were a lot of people dropping out and just surviving off of unemployment or picking up multiple hourly part-time jobs. Uber, Lyft and others like it sprang up out of desperation. The GDP was erratic which does not build a strong base. All in all, I believe Obama was positioned perfectly to see major improvements coming out of the 2008 recession but instead we saw a lackluster performance. On the other hand Trump was handed an erratic economy with declining job participation rates and a theoretical full employment condition and was able to increase the job participation rates through massive generation of new jobs, stabilize the economy and allow the market to reach new highs withstanding an intentional shut down of the economy. I would have to say this is truly a unique time and unique economy like we have never seen before. The credit must honestly be given to Trump for the current strength.
Thanks for taking the time to read my article and I hope you have a better understanding of the economic world we live in as a result.