US economic strength adds power to Donald Trump’s elbow

Donald Trump is again feeling belligerent towards China, and his harsher tone appears to have been encouraged by the unexpected strength of the US economy and stock market, which gives the president some leeway to fuel trade strife.

As he prepares to meet Chinese negotiators in Washington on Thursday, Mr Trump is relying on his country’s upbeat economic performance to bolster his negotiating stance.

He recently claimed on Twitter that he had achieved “perhaps the greatest economy and most successful first two years of any president in history”, a view of his role that fits with his argument that “trade wars are good and easy to win”.

But is the US economy performing well because of the president — and is it strong enough to withstand further trade tensions?

US economic growth is strong

There is no doubt that the US is the strongest large economy in the world. While European economies slowed sharply in 2018, the US annual growth rate continued to improve on the back of the tax cuts Mr Trump enacted in late 2017.

The US economy expanded at an annualised pace of 3.2 per cent in the first quarter, a much faster rate than anticipated.

But Mr Trump needs to be careful: much of the growth surprise appears temporary.

Rising inventories accounted for 20 per cent of US growth in the first quarter, and imports fell because traders had previously bought foreign goods in a bid to get ahead of the initial tariff increases Mr Trump had announced.

Neither of these elements of growth is likely to continue in the coming months.

But manufacturing output is fragile

A look at the underlying data raises doubts about whether the US economy is as strong as headline growth figures suggest.

For example, industrial production peaked in December and fell in the first quarter of this year, after a strong 2017 and 2018.

The US PMI survey of manufacturers has fallen from a historically high 60.8 in August to 52.8 last month, suggesting manufacturers feel that their business trading environment has deteriorated significantly. That leaves the US in line with other large manufacturers such as Germany, Japan and South Korea, where manufacturing has also become a weak spot.

Labour market is strong but not world-beating

Jobs are still being added and the unemployment rate has fallen to 3.6 per cent, the lowest rate in 50 years, but the US labour market does not look as good at creating jobs as the success stories of Europe and Japan.

Although unemployment is historically low, the rate of employment is relatively weak, indicating that men and women have given up on the labour market; the US has relatively high rates of people who are unable to work because of illness.

Meanwhile, jobs growth has not generated inflation. The US Federal Reserve’s favoured annual price changes measure decelerated to 1.6 per cent in March and there is no sign that interest rates will rise further; markets now expect the Fed to cut rates by the end of the year in a bid to boost growth and inflation.

Attention is on the bilateral deficit with China

Mr Trump has said he will not rest until the goods trade deficit between the US and China is narrowed. “With China we lose 500 billion dollars,” he tweeted last weekend.

This is an exaggeration. The US goods trade deficit with China has grown fast and hit $419bn in 2018, but that is considerably short of the president’s claims, particularly as the US also had a $40bn services trade surplus with China in 2018.

Mr Trump was probably referring to the level of goods imports from China, which hit $540bn last year.

But the current account deficit is more important

In prioritising the trade in goods with one country and seeing imports as a loss, economists think Mr Trump has erred. The IMF said last month that overall trade imbalances are what matter, not trade imbalances with any one other country.

If the US seeks to limit its goods deficit with China, it is likely to raise its trade deficits with other countries, the IMF suggested.

“Put simply, the US was, in the aggregate, spending more than it was producing, so it had to import more goods from its trading partners,” the IMF added.

The US current account deficit is still nothing like the size it reached in the run-up to the financial crisis. But it is growing, and that is only likely to change if the rate of economic growth falls — not an outcome that Mr Trump is likely to welcome.

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