By Mike Dolan
LONDON (Reuters) – In many respects, Donald Trump inherited the “golden age” he claims to be ushering in. All he really needs to do is not screw it up.
In economic and financial terms, the United States has rarely been in better health.
The world’s largest economy has been humming at annualized growth rates close to 3% over the past year, its potential growth has increased since before the pandemic and a technology-led performance gap with the rest of the world is stark and widening. Less than 5% of global investors see any chance of a U.S. downturn on the horizon.
Jobs are plentiful, the economy remains at full employment by any reasonable definition, and inflation-adjusted annual wage growth is running at twice the 40-year average.
The post-pandemic inflation spike that forced a brutal squeeze in borrowing costs has subsided. Inflation has fallen back down near the Federal Reserve’s 2% target, and interest rates are declining again as a result.
To be sure, part of the steep price paid to get here is the bloated U.S. government deficit, which has expanded to a worrying 6% of national output and nudged the U.S. public debt pile north of a full year’s gross domestic product.
But thanks in part to the dollar’s durable role as the world’s dominant reserve currency, creditors at home and abroad remain relatively relaxed, and there have been few signs of stress in government funding channels.
In fact, America has been attracting overseas direct and portfolio investment like never before, with its world-beating, mega-sized companies. U.S. equity now accounts for some two-thirds of the entire capitalization of global stock indexes.
What’s not to like? Even if not “golden,” this is a rare period of sustained prosperity that everyone else on the planet seems envious of and wants to invest in. Keep it quiet, but the global investment world has been thinking “America First” in many ways for at least the past four years.
RICH ‘AGAIN’?
And yet, in his inauguration speech on Monday, Trump insisted “the golden age of America begins right now.”
“We will be a rich nation again,” Trump added later.
That’s an odd aspiration for an economy that is already one of the richest on the planet, with annual GDP per capita of nearly $87,000 last year. That’s some 60% more than Germany or Britain, more than twice that of Japan and seven times that in China.
Meanwhile, investors don’t appear entirely convinced that there will only be sunshine ahead. Since the election, markets have been agitated by the risk that many of Trump’s proposed policies – additional tax cuts, fewer migrant workers and resulting higher wages, and elevated import costs due to broad tariffs – could rekindle inflation and add even more to budget deficits.
And with an economy operating at near perfect pitch, there is considerable trepidation that over-stimulation at this point could trigger some bad outcomes.
One of the biggest fears is that bond markets could react to aggravated inflation and deficits by puncturing the whole bubble with a brutal rise in credit costs – a brief glimpse of which was seen at the turn of the year.
The Trump team retort is that inflation risks will be curbed by a mix of oil and gas drilling that cheapens energy prices and swathes of deregulation. Meanwhile, tax cuts will be funded by reducing public spending, downsizing government and hiking import tariffs to bring in overseas revenues.
Yet anxiety remains that Trump’s policies will ape his hyperbolic rhetoric, prompting the eclipse of a golden era rather than its dawn.
MARKET LOOP-THE-LOOPS
Investors examining the first 24 hours of the new administration for clues about what to expect in the next four years might conclude we are going to get a lot of fiery speeches and market price loop-the-loops.
But it’s still far less clear whether the rhetoric will be matched by the scale of the eventual outcomes.
In advance of the inauguration, the dollar had risen and overseas stock markets had cowered, partly due to Trump’s repeated promise of implementing day-one tariff increases. Yet the speech and related executive orders and directives have contained no specifics.
The dollar duly retreated, but then Trump insisted tariffs on Mexico and Canada would come next month, if they do not make further commitments to halt illegal migration and drug trafficking. Implementing universal tariffs and a review of the U.S. relationship with China, he said, would take longer.
The dollar and stocks perked up again, with many prices returning roughly to where they were before the inauguration.
The upshot is that the tariffs may come, but it’s still not entirely clear where or when. And while markets will continue to gyrate around the president’s rattling sabre, it’s possible that neither the eventual policy measures nor the net market outcomes may ultimately amount to very much.
For the economy at large, that may well be the most sensible course Trump’s team can take. Plenty of loud headlines around marginal tweaks – but no crash, bang or wallop.
That way the golden age Trump aspires to has some chance of mirroring the gilded one he’s stepped into.
The opinions expressed here are those of the author, a columnist for Reuters.
(by Mike Dolan; Editing by Rod Nickel)