Trump’s speech to Congress in 90 seconds
President Trump is already taking a victory lap on the economy.
"Since November 8th, Election Day, the Stock Market has posted $3.2 trillion in GAINS and consumer confidence is at a 15 year high. Jobs!" Trump tweeted Thursday morning.
His facts are correct. Optimism is sexy again on Wall Street and Main Street.
Frankly, he could have tweeted even more good economic news: Jobless claims just hit the lowest level in 44 years, a sign businesses aren’t doing much firing. Small business optimism is the highest it’s been in over 12 years.
Even manufacturing is bouncing back. The closely watched Institute for Supply Management (ISM) manufacturing index came out this week and showed the best number in two years.
But all of this good economic data comes with three red flags.
1. Trump and Congress have to deliver the goods. Investors have sent the stock market up nearly 15% since Trump’s election because of his promises to deliver "bigly" on tax cuts, infrastructure spending on roads and bridges and a total health care overhaul.
Now big dreams have to translate into big actions. All of Trump’s policies are massive undertakings that will require a normally slow-moving Congress to act. And act quickly. Trump’s Treasury Secretary said he fully expects to get the largest overhaul to the tax code since President Reagan done by August. (Reagan didn’t get his major tax reform package done until his second term).
"The hard work is still ahead," cautions economist Ed Yardeni of Yardeni Research. It means "getting the bullish part of the Trump agenda passed by Congress while blocking the bearish parts that have to do with protectionism."
Then there’s the thorny question about whether investors and CEOs will still be as giddy after they see the details of these bills. Already some big businesses are alarmed by the so-called border-tax adjustment idea. On infrastructure, Wall Street likes the $1 trillion price tag, but a lot of Republicans, who have spent years fretting about the debt, are balking at the big number. And then there’s health care reform. As the president admitted this week, it’s "so complicated."
2. All the giddiness has to translate into Americans spending. In order for all the optimism to truly translate into a Trump boom, people and businesses have to go out and spend more. Consumer spending still drives about 70% of the U.S. economy. It’s very early days, but the latest data out this week on consumer spending was a huge disappointment.
Real consumption fell 0.3% in January, the largest one-month drop in three years. It was such a shock that the Atlanta Federal Reserve slashed its forecast for U.S. economic growth in the first quarter from 2.5% to 1.8%.
"There remains a disconnect between surveyed optimism and the reality of the underlying data," says Lindsey Piegza, chief economist at Stifel.
It’s possible that this is just a blip. For the past few years, Americans have shown a tendency to clamp down and not buy much in the winter. That changes when the weather improves.
"There’s a real chance we see a break out on the consumer side," says Brad McMillan, chief investment officer at Commonwealth Financial. "Right now, I’m as positive as I’ve been in the past several years."
To achieve the 4% growth Trump has promised, it’s going to take a lot more spending than what’s been happening in prior "spring bounces." The U.S. grew at about 2% a year under President Obama.
3. Janet Yellen can’t break up the Trump party. While Trump dominates the headlines, especially after his heavily praised speech this week, the Federal Reserve is an equally powerful player in the fate of the U.S. economy.
For years, the Fed has made it extremely cheap for Americans on Main Street and Wall Street to borrow money. That’s helped fuel the stock market surge (it’s up over 250% since bottoming out in march 2009) and a return to buying big ticket items like homes and cars.
But the Fed, led by Janet Yellen, is giving strong signals that it intends to raise interest rates, meaning an end to the easy days of borrowing money.
"The case for monetary policy tightening has become a lot more compelling," Fed vice chair Bill Dudley told CNN this week.
It’s possible that the three rate hikes the Fed has in mind for 2017 are simply taken as a sign that the U.S. economy is finally healthy again. It’s also possible that the rate hikes cause home purchases and already anemic business spending (so-called "capital expenditures") to plateau or even decline as borrowing costs rise.
No one truly knows how the world will react if the Fed starts raising rates more rapidly. Interest rates haven’t been above 1% since 2008 (the current rate is 0.5% to 0.75%), and the Fed hasn’t done multiple rate hikes in a single year since 2006.
The bottom line is: Trump needs a lot of factors to fall into place to truly hypercharge growth. It’s possible it happens. Trump has a track record of defying the odds. But there’s also a plausible scenario where the bullish dreams of Wall Street don’t quite translate into a true economic renaissance.