Mark Lister, 12 September 2018

The good news out of the United States just keeps on coming. The economy is firing on all cylinders and no matter what you think of President Trump, it’s difficult to argue he’s not at least partly responsible for some of the progress.

Within the last seven days we’ve seen two pieces of good news. The first was the ISM index, a key manufacturing indicator, which rose to the highest level since May 2004. Excluding that month, the last time the ISM was higher was way back in 1983.

The second example of economic strength was within the detail of the latest jobs report. Average hourly earnings grew 2.9 per cent from a year earlier, ahead of forecasts and the strongest since the middle of 2009.

Economic growth in the US is running at the strongest pace in four years, while the headline unemployment rate is sitting at 3.9 per cent, the lowest in almost fifty years. A broader measure of joblessness is at the lowest levels in nearly two decades.

This backdrop is having a major impact on confidence, for consumers as well as businesses. Consumer confidence is the highest in 18 years, while small business optimism hasn’t been this good since Ronald Reagan’s first term in office, some 35 years ago.

All of that has flowed through to corporate profitability, with earnings growth from the S&P 500 running at more than 20 per cent per annum over the last two quarters. We haven’t seen those sort of numbers since 2011, when earnings were rebounding from the GFC lows.

Unsurprisingly, the sharemarket has been a stunning performer. US shares have returned almost 40 per cent in the last two years, ahead of most other global markets, including ours.

If you’d invested from this part of the world you’d have done better still, due to the double whammy of a rising market and the resurgent greenback.

Trump can’t take all of the credit. Things were improving before he even took office. However, cutting taxes, reducing regulatory burdens and providing some much needed infrastructure spending have pushed things along.

The big question from here is whether it’s sustainable. Lower taxes and higher spending is a recipe for rising debt levels, and the US already has enough of that.

There are also risks around the trade tariffs he is aiming at other countries. Supply chains are so integrated these days that US companies won’t be immune, and those who depend on exports could face retaliatory action from China and elsewhere.

US interest rates are also moving higher at a fairly rapid pace, on the back of evidence inflation is returning to normal. The two-yield Treasury yield finished last week at a decade high, in anticipation of the Federal Reserve raising interest rates two more times this year.

It’ll be some time before we can look back and judge the Trump administration on its economic policies, or assess the impact they had on this year’s midterms as well as the 2020 election.

But for the time being, we should be happy the world’s biggest economy and our third biggest export market is in pretty good shape. The global outlook would look a lot uglier if it weren’t.


This article was also published in the NZ Herald on 9 September under the title "Mark Lister: Why Donald Trump deserves some credit for the booming US economy".