January 30, 2018
It is virtually certain that Donald Trump will devote much of his State of the Union Address to boasting about the economy. And there is something to boast about there: the economy is looking better by most measures than it has since 2001. However, he has had almost nothing to do with the economy’s performance to date. What we have seen in the last year is a continuation of trends that were in place for the prior six years.
To take a few examples, 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.
There was a modest uptick in GDP, with a rise to 2.6 percent in 2017, compared to 1.8 percent in 2016 and 2.0 percent in 2015. However, this rise was due almost entirely to an increase in investment in the oil and gas industry, which is, in turn, a direct result of higher world energy prices.
It’s too early to expect much impact from the tax cuts, but if it really is going to lead to the investment surge promised by the administration, we might have expected to see some sign in December’s capital goods orders. Instead, they slipped 0.1 percent from the November level.
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.
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 three percent annual rate in the third-quarter, compared to growth at less than a one 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, since it will mean faster growth in wages and improvements in living standards.
But here too, as Jared Bernstein and I argued last year, the key is the tightening of labor markets that had been going on for the prior six years, not anything that Trump has done since taking office.
In short, when President Trump boasts about the state of the economy he will be singing the praise of his fired Federal Reserve Chair Janet Yellen and President Obama, not his performance as president.
