Will Trumponomics Drive America into Another Recession?

The Trump economy received an “important endorsement” from Fed Chairman Jay Power, who said, “The US economy is in great shape…Most people who want to find jobs are finding them,” said an article published by Yahoo Finance on June 15, 2018.

Given that unemployment in the US has dropped to 3.8% and economists are now forecasting GDP growth of 4% or more for Q2 of 2018, it certainly seems as though President Trump’s capitalism-heavy economic policies are working to “Make America Great Again.”

Capitalism Against the Backdrop of Protectionism

So, why does Yahoo Finance’s Trump-o-Meter give the American President a Mediocre or C rating? The problem is that Donald Trump’s policies are taking economics to an era of trade wars. When the rest of the world is moving towards liberalization of economies and lucrative international trade deals, America seems to be retreating into a protectionist shell.

The reason for this is that President Trump believes that “the rest of the world is buying far too little from the US compared to what the US is buying from it and this boils down to boosting employment abroad at the expense of US jobs.”

With the US President and his team believing that the entire world is taking advantage of America, with both global and individual trade deals biased against America, it should come as no surprise that not only is the nation withdrawing from existing deals but also imposing what many see an unreasonable and even harsh duties on US products imported by other nations. Of course, the reason that Donald Trump provides for these trade tariffs is that it will motivate domestics manufacturers to increase production, which in turn will fuel employment.

But, does the President have the bigger picture in mind? How will his economic policies impact the country in the long term?

As far as lowering taxes and regulating less are concerned, it is positive. But, trade and immigration policies are negative.

Trade Deficit Could Increase

While the US Bureau of Economic Analysis estimated the nation’s trade deficit at $568.4 billion for 2017, the gap as risen close to a 9.5 year high, standing at $57.6 billion in February 2018.

What is worse is that many economists are now predicting a further widening of the trade deficit, following import duties imposed by the Trump Administration. This is because the nations on which these duties are being imposed will retaliate by raising their tariffs too. And, the US is a net importer.

Reuters quoted John Ryding, chief economist at RDQ Economics, New York, as saying “We suspect widening trade deficits and resulting subtractions from GDP growth will be a persistent feature of GDP this year as domestic demand outpaces the economy’s supply potential.”

“Tariffs will do nothing to lessen this trade imbalance, unless there is a retaliatory escalation that leads to an economic downturn,” Ryding added.

Where Will it Lead America?

In agreement with Reuters, an article in The Economist stated that President Trump would either have to abandon his pursuit of “fair trade” or try to narrow the deficit through further protectionist duties, which would actually hurt the American economy, while breeding mistrust for the nation among the rest of the world.

The problem also lies in the fact that both Trump and his advisers seem to obsessed with the manufacturing sector. However, the reality is that this sector only employs 8.5% of the US workforce and contributes just 12% of the GDP. The services sector is a much larger and impactful one for the nation.

Unfortunately, with a blinkered stance, Trumponomics really does not perceive the biggest cause for concern for the US economy today. It is the technological advancements that are hurting American retailing much more than trade. And, the retail sector employs a much higher percentage of the workforce than manufacturing. For instance, with automation and machine learning becoming a reality, companies that are no longer able to outsource work to cheaper regions will adopt newer technologies, which would have an effect on the employment rates in the US anyway.

With all these concerns plaguing the American economy, economists are now predicting that a recession could occur over the next two years, with Trump’s protectionism driving a downturn.

Will import tariffs and bans help an economy prosper? Read my thoughts.