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To date, the strength of the US economy has been a pillar of the President’s credibility. In the final year of the Obama Administration, the economy grew just 1.6 per cent. Since the Trump Administration came to power, the economy has grown at about 2.5 per cent. The stock market has also reached record heights. And the President hasn’t been shy about claiming credit. 

Stock Market is heading for one of the best months (June) in the history of our Country. Thank you Mr. President! (@realDonaldTrump Jun 25, 2019)

The Stock Market went up massively from the day after I won the Election, all the way up to the day that I took office, because of the enthusiasm for the fact that I was going to be President. That big Stock Market increase must be credited to me. If Hillary won – a Big Crash! (@realDonaldTrump Jun 28, 2019)

Last week Earlier this month (sorry I’ve been traveling) the Fed Reserve dropped the Federal Funds Rate for the first time in a decade. It follows nine successive increases that began in 2015.

 

The cut suggests that the US economy is in trouble, or at least is headed for trouble. GDP growth slipped last quarter to 2.1 per cent, labour markets have disappointed the last few months and business investment decreased for the first time in three years. While (importantly) consumer spending remains strong, there’s a sense that always-looming-never-eventuating trade war storm clouds might finally turn into a storm. The rate cut aims to promote spending and borrowing, with a hope of spurring on jobs and production.

 

The cut took markets a little by surprise – they thought the Fed would go further. Normally when the US drops its rate, the Aussie dollar rises. When the Fed cut this time around however, the AUD fell. Markets were anticipating a much deeper cut, 0.5 percentage points, and this had flown through currency markets. So when the Fed dropped the rate by half that, it was effectively a pseudo-increase.

 

The President has been actively campaigning the independent Fed to cut for months, blaming the declining health of the US economy on their “incompetence”.

Strong jobs report, low inflation, and other countries around the world doing anything possible to take advantage of the United States, knowing that our Federal Reserve doesn’t have a clue! They raised rates too soon, too often, & tightened, while others did just the opposite… As well as we are doing from the day after the great Election, when the Market shot right up, it could have been even better – massive additional wealth would have been created, & used very well. Our most difficult problem is not our competitors, it is the Federal Reserve! (@realDonaldTrump Jul 5, 2019)

 

It’s true that the economy boomed in Trump’s first year. Both the S&P 500 and the Dow Jones Industrial average grew 30 per cent between the election and the first anniversary of his swearing in. But neither have grown much in the 18+ months since: the S&P 500 by just 2.3 per cent; and the Dow by 1.2 per cent. All that’s despite the economy being super charged by the cans of economic Red Bull through tax cuts and record government spending.

 

Down on the corner of Main St and MAGA Way, things aren’t much better in the real economy. The Fed’s 12 regional offices use the words modest, slowed, flat, and slight to describe growth in their local economies (with the exception of Minneapolis, where growth is “modest to moderate”). The price of soybeans hasn’t been this low since 2008. Any gains enjoyed in the price of coal since the election have been washed away. The US auto industry has stopped haemorrhaging (a decrease of 25 per cent during the Administration’s first year), but the bleeding hasn’t stopped (down 4 per cent since). Boeing delivered fewer planes in July than in any month over the past decade. At just 258 planes delivered, this is well below the 417 planes delivered the same time last year. They’re about to surrender the crown of world’s biggest aircraft manufacturer to the European Airbus. 

 

Commentators are divided on the merits of the cut. Some favourably describe it as a pre-emptive strike designed to ward off a recession. Others are concerned that the Fed has struck too soon – there’s now nothing left in the arsenal should a recession come to bare. Either way, the R word is being thrown around quite a bit.