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Dean Baker | It’s Still the Yellen-Obama Economy

In the State of the Union address we are likely to hear Donald Trump boast about the great economy.

Chair of the Board of Governors of the Federal Reserve System Janet Yellen. (Photo: Brookings institution)

Donald Trump has been eagerly taking credit for the relatively strong economy over his first year in office. Apparently he thinks that people were so inspired by seeing him in the White House that they decided to keep doing what they were doing before he was in the White House. In other words, the economy looks like what would be expected if President Obama had served another year in office.

Just to give the basic data, 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 a month in 2015. This brought the unemployment rate 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 not any kind of break from the prior pattern.

The real average hourly wage increased by 0.4 percent from December 2016 to December 2017. That is down from an increase of 0.8 percent in 2016 and 1.8 percent in 2015. However, this slowing of wage growth is due to higher inflation, which was in turn due almost entirely to higher energy prices.

If we look to GDP growth, there is a modest uptick in the rate, with GDP advancing 2.6 percent over the year, compared to 1.8 percent in 2016 and 2.0 percent in 2015. The more rapid growth was primarily due to nonresidential investment. Investment grew 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 only category of investment that increased notably was equipment spending. Equipment spending was up 8.8 percent in 2017 after falling 3.5 percent in 2016. Investment on structures increased at almost the same pace as in 2016 (3.7 percent in 2017 compared to 3.5 percent in 2016). Investment in intellectual products actually dipped slightly from the 2016 pace.

A simpler explanation for the rise in equipment investment than America being great again is that higher world energy prices have led to more investment in oil and gas. If we pull out investment in this sector, equipment investment was up by just 3.3 percent in 2017, roughly the same as the rise in 2016, excluding the mining sector. In fact, the 6.3 percent growth rate of investment for 2017 is almost identical to the 6.1 percent rate in 2014, before world energy prices collapsed.

The evidence to date is that we are not seeing the promised investment boom from the Trump tax cuts. New orders for capital goods actually slipped slightly in December, coming in 0.1 percent below their November level. While this is still early, 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. This should have allowed at least some companies to get their orders in before the end of December. The data indicates there was no such rush.

In spite of Trump’s get-tough rhetoric, the trade deficit actually rose by $50 billion in 2017 to $571 billion. It now stands at just under 3.0 percent of GDP.

While there is little evidence that anything Trump has done to date led to a pickup in growth, the economy is looking pretty good, at least by the standards of the last 45 years. The unemployment rate is the lowest it has been since the early 1970s, with the lone exception of 2000. However, we must remember that the employment rate of prime-age workers (ages 25 to 54) is still well below pre-recession levels, suggesting there are still many more people who would like to work, if given the opportunity.

Real wages have been rising for the last three years, the only time this has been the case since the early 1970s, 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 percent at the 10th percentile.

There is 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 percent annual rate in the third-quarter, compared to growth at less than a 1 percent rate in the prior five years. It’s too early to say that we are on a faster productivity track, but if we are, it is a really big deal. It will allow much faster growth in wages and improvements in living standards.

In the State of the Union address we are likely to hear Donald Trump boast about the great economy. He has a case, except he will be boasting about the economy of his fired Federal Reserve Chair Janet Yellen and President Obama, not one that he has yet been shaped by his policies.

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