Under Trump, a Strong Economy but Murky Policy Outlook

During Barack Obama’s presidency, uncertainty about U.S. economic policy was much higher than it had been during the previous 25 years, according to calculations by a trio of academic economists.

You would think uncertainty would be low now, with economic expansion advanced and secure, the global economy on a stable footing, and a president in the White House focused on helping business by cutting regulation.

But it isn’t. The researchers find economic policy uncertainty is slightly higher under President Donald Trump than it was during an Obama era marked by deep recession, auto bailouts, unconventional Federal Reserve interventions into the financial system and routine brinkmanship between Democrats and Republicans on fiscal policy.

The academics devised an “economic policy uncertainty index” that tracks mentions of the words “uncertain” and “uncertainty” in major newspapers’ articles about economic policy. The index averaged 140.2 during Mr. Trump’s first 13 months in office, compared with 126.0 during the comparable period of Mr. Obama’s tenure and 134.7 during his full two terms in office.

In January and February of this year, the index averaged 127, still well above its average of 100 between 1985 and 2010. The measure was developed by Scott Baker, Nicholas Bloom and Steven Davis, of Northwestern University, Stanford University and the University of Chicago Booth School of Business, respectively.

“Obama was president in a time when you needed extreme policy action,” said Mr. Bloom. “Trump has incredibly benign economic conditions. He should have very low levels of policy uncertainty.”

It is hard to say exactly why uncertainty is high now. Mr. Bloom said it is likely partly because of big policy changes happening in Washington — such as an aggressive new stance on trade — and partly because of the decision-making process, which he described as chaotic.

Investors got a taste of Trump era economic policy uncertainty in recent weeks: New U.S. tariffs on steel and aluminum imports and a range of goods imported from China; exemptions from those tariffs dribbled out piecemeal; federal government intervention to stop the proposed acquisition of Qualcomm Inc. by a foreign competitor on national security grounds; and the acquisition of Time Warner Inc. by AT&T Inc. landing in federal court.

Last week, Amazon Inc.’s share price dropped 4% in a day after a news report by Axios that Mr. Trump wanted the company to pay more taxes and had concerns that its business model is hurting brick-and-mortar retailers. Facebook Inc.’s shares were off 10% in March amid a Federal Trade Commission investigation and fears of a regulatory crackdown.

“It has been a gut punch to tech investors,” Daniel Ives, chief strategy officer at GBH Insights, an investment research firm, said of the Amazon and Facebook developments. “These stocks and their multiples were not factoring in increased regulation.”

Boeing Co.’s shares, seen by many investors as a proxy for companies that could be most affected by an all-out trade war between the U.S. and China, were down 9% in March.

In theory, uncertainty about the economy and economic policy leads to less investment, less hiring and slower economic growth, though it would be hard to argue that is a problem now. Business investment rose 6% in 2017, up from an annual average of 3% during Mr. Obama’s presidency. Overall economic growth picked up last year and the jobless rate, at 4.1%, is at its lowest level since 2000.

Mr. Trump’s supporters can argue policy uncertainty is the outcome of delivering on the changes he had promised, said Stanford’s Mr. Bloom. That includes a more muscular trade policy that demands other countries open up as much to U.S. trade as the U.S. does to them, and support of blue collar industries such as manufacturing.

Still, he said, the chaos surrounding Mr. Trump’s policies represents “an unnecessary cost” to the economy.

Complicating matters, it is hard to see a comprehensive policy framework behind Mr. Trump’s interventions into the economy, making it hard to predict what might come next.

Some analysts have described the nation’s evolving trade approach as mercantilism, a government effort to prop up exports and restrain imports in pursuit of trade and financial surpluses. But Qualcomm, AT&T and Amazon aren’t about that. Nor is it quite industrial policy, which is government selection of certain industries over others, as Japan practiced in the 1980s and 1990s.

“He’s picking winners and losers,” said Matthew Slaughter, dean of Dartmouth’s Tuck School of Business, who also served as an economist at the Council of Economic Advisers under President George W. Bush. “But it is not obvious what the unifying strategy would be and it is not obvious what the definition of winners and losers are in these cases.”

Andy Laperriere, an analyst at Cornerstone Macro, an economic research firm in Washington, said there is no question the president’s recent trade moves are creating uncertainty and angst in financial markets. But other actions, like the shots he took at Amazon, are more benign because they won’t amount to much change in regulation.

“The regulatory machinery is not likely to be put into motion because the president has a grudge against Amazon,” he said.

His advice to Wall Street: “Don’t fear the Tweeter.”
Source: Dow Jones


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