Will the economy save Trump?
WASHINGTON -- For President Trump, a lot is riding on the economy in 2018. If it continues to do well, it should bolster his popularity and his claim that he understands it better than his critics. But if it slows or drops into a recession, it would weaken that claim -- perhaps his strongest selling point.
So, what's the economic prognosis?
First, the usual caveat: Presidents have only limited influence over the business cycle, which is heavily driven by outside events, past policies and the Federal Reserve. No matter. People still tend to credit or blame the sitting president for the economy's performance.
For Trump, that's fabulous news. The economy is thriving, and most mainstream analysts believe it will stay that way through the year. An improving global economy compounds the effect.
Consider the forecast from IHS Markit, a consulting firm. It expects U.S. economic growth of 2.6 percent in 2018, better than the 2.3 percent in 2017 and much better than the 1.5 percent in 2016. The unemployment rate, now 4.1 percent, will drop below 4 percent. But inflation won't worsen. For 2018, consumer prices are expected to increase 1.3 percent, down from 2017's 2.1 percent.
All this recalls the "Goldilocks economy" of the late 1990s, when growth was fast enough to create jobs but not so fast as to stoke sharply higher inflation. More jobs, rising home prices and a surging stock market are boosting "consumer spending, [business] capital expenditures, and housing," Nariman Behravesh, IHS Markit's chief economist, told clients.
Who gets credit? Democrats can argue that 90 percent of the 17.6 million new jobs since the Great Recession's low point occurred during Barack Obama's presidency. Trump supporters can retort that the galloping stock market reflects confidence that his pro-business policies will raise economic growth.
The more interesting question is whether events might derail the standard 2018 forecast. There are many possible threats: higher interest rates from the Fed; a financial crisis in China; war on the Korean Peninsula; a surprise leap in inflation. But the clearest danger comes from sky-high stock prices.
From the 2016 election to the end of 2017, stocks rose 26 percent, propelled by advances in tech stocks, according to Wilshire Associates. That's a paper gain of $6.7 trillion. By many standard measures, the resulting prices of U.S. stocks are high. The market's P/E ratio (stock prices compared to their earnings -- that is, their profits) is about 24 for the Standard & Poor's 500 stocks compared with a historical average of 17 since 1936, reports Howard Silverblatt of S&P.
"Stock prices are a source of recession risk," argue economists Gail Fosler and Edward Logan of the GailFosler Group.