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AB 2000 studies

Alain Boublil Blog


The American economy under Donald Trump

The latest estimation of the American growth rate during the second 2018 quarter has just been published: 4.2%. It is an annualized rate. In Europe we use quarterly rates which give the illusion that our numbers are much lower than they are in reality. In using the same method, the American quarterly rate is closed to 1%. Compared to French 0.2% rate for the first 2018 two quarters, the achievement is enviable. During the last twelve months, American growth is close to 3%, which is twice higher than in the eurozone and nothing allows us to think that this gap between the two Worlds will be filled during the coming months.

Unemployment rate went back under 4% during last summer. It is inferior to the level reached before the crisis (5%). The diminution has been continuous since 2010 and has slightly accelerated after Donald Trump election. But this achievement must be put in perspective because a lot of American people, out of the job market during the recession, have been discouraged and have not tried to come back to the market to get a new job. The activity rate which measures the ratio between population with a working age and the population which is working has fallen. From 65.7% at the beginning of 2008, it has fallen today to 62.7%. There is still a long way to go but these achievements are much better than in Europe where unemployment rate is, as an average, twice higher.

Growth acceleration has not lead to tensions on wages and inflationist pressures. Prices rise is, like in Europe, around 2% and the Federal Reserve increases very progressively its interest rates, which, in real terms are still near zero. These low rates support investment and growth because the rate curb is rather flat with a 1% difference between daily and ten years and longer terms rates. Enterprises and especially households including students who are carrying a 1600 billion dollars debt, are taking advantage of that policy.

The economic strategy of the Trump administration relies on a strong corporate tax reduction and on the increase of the budget deficit, coming from 666 billion dollars in 2017 fiscal year, i.e. 3.4% of the GDP, an 80 billion increase on the previous year, to near 800 billion for 2018 fiscal year. Congressional Budget Office, which is an independent and non partisan body, is forecasting for 2019 fiscal year a deficit approaching 1000 billion dollars. The president of the United States considers that the growth generated by this favorable corporate environment will create new fiscal receipts which will fill these deficits in the future. That remains to be proved.

Foreign exchanges situation is quite also unbalanced. Trade in goods deficit is increasing almost at the same rhythm than the budget deficit. It has reached 800 billion dollars in 2017 and will overpass, with 850 billion, the record reached in 2007 and 2008, at the eve of the crisis. It is probably what has convinced Donald Trump to launch a violent criticism of free-trade and to start a true trade war first with neighboring countries, with which he has just concluded an armistice, with Europe and, especially with China. But it will appear soon that the U.S. has more to lose than to win because, at the end, customs duties which will be instituted will be paid by American consumers.

Donald Trump is confronted with the same dilemma about oil prices. Expensive oil has always been in the interest of the U.S. and it is even more the case since the shale revolution. The country has regained its place among the major producers because the price rise has permitted the major companies to invest again. But that has been passed on consumers with much more violence than in France for instance where the level of taxes is determining and that has aggravated the trade deficit since the country is still massively an importer. So Donald Trump has asked OPEC, and implicitly Russia, to increase their production. But American diplomacy, through sanctions against Iran and Russia has played an essential role in the fall or the stagnation of their production, which was at the origin of the rebound of oil prices.

At the end, Wall Street has reached records after a ten years rising cycle, which is without precedent. It was not necessary to have more arguments, despite all the critics addressed to the American president about his government practices and his isolationist will, to soften critics in front of such achievements. And if this way is the right one, and if it was the model to follow, despite the risks it weights on the world economy? Observers have yet there a short memory. In 2007, at the eve of the great financial crisis which took source in the U.S., admiration was also quite unanimous in front of the achievements of the American economy, high growth, low unemployment and euphoric financial markets. Parallel is tempting. Today, America is becoming wealthier but the sharing of the created wealth has never been so unequal. It is always a worrying signal. Unemployment is at its lowest level but the indicator imperfectly reflects the employment situation.

Valorization of American companies is much higher than their European counterparts. But it is one of the consequences of Donald Trump fiscal policy. In encouraging these ones to repatriate profits made outside of the country and put in tax heavens, they got at their disposal huge liquidities. They used a good share of them in distributing dividends or in buying back their shares on the market. That could amount to 800 billion dollars in 2018 and that has pushed up Wall Street. Market capitalization of several American companies rose above 1 000 billion, which, in case of a downturn, would generate huge losses. The amounts are so high that a market fall would have a systemic character.

The other risk is about the dollar itself. American prosperity is artificial because its huge deficits are financed by foreign money: first, China and Japan, which is not the least paradox due to the trade war climate which reigns with these countries. The emerging countries crisis has also contributed to finance these deficits. It has incited their nationals to put their savings in dollars, because they have no alternative. The euro couldn’t play that role due to the constant divisions which are affecting Europe. But these situations are necessarily transitional and China, for instance, is determined to acquire its international financial sovereignty through its own currency.

American prosperity is, as in 2007, illusory and precarious. It is a paradox to hail “America first” and to make the economy relying on foreign money. It is vain to believe that it is in confronting with its trade partners that you win. Through this game, it is always the countries which carry a surplus which, at the end are the winners. The sooner the U.S. will change the orientation of their current policy in a more cooperative direction, the faster the risks of a new financial crisis will move away. The American president cannot indefinitely say the America is his country but is our problem.      




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