Trump can take a bow for current economic upswing

It is said that in football, the quarterback gets too much credit when his team succeeds and too much blame when his team struggles. The same is true in politics, as the president is often judged by how the economy performs during his tenure, whether he really had much of an impact on the economy or not.

Most of the time, claims of credit for a strong economy by our leaders are predominantly political spin, but there are times when policy matters. In the recent environment, policy has mattered — a lot.

{mosads}The prior administration took an aggressive approach toward regulation, typically favoring other goals at the expense of economic growth, and that is pretty much how things turned out. It was probably underappreciated at the time how much of an impediment tough regulations were to growth.

Business leaders were hesitant, not only due to the anti-growth bent of regulatory policy but more importantly as a result of the perceived arbitrariness of the government’s actions, as entire sectors of the economy were subject to game-changing decisions that could not have been foreseen based on past experience.

As a result, many business decision-makers shelved multi-year investment projects because they were unable to predict with a high degree of confidence how the policy backdrop would impact their finances several years ahead.

Similarly, the on-again, off-again prospects of corporate tax reform led firms to sit on the sidelines, awaiting resolution on that key source of uncertainty.

Real economic growth in the 2009-2016 period averaged 1.8 percent, well below historical norms. The shortfall relative to prior expansions was mostly a function of soft business investment.

Once the direction of the regulatory environment became clear, gains in business investment in plant and equipment began to taper off, and the average annual increase over the 2013-2016 period worked out to less than 3 percent in real terms, far lower than in prior expansions.

After the election results in November 2016, business and consumer confidence immediately surged, as there was a broadly-held view that the new administration would take a friendlier approach toward business.

Indeed, there have been a number of dramatic changes in the regulatory environment that have worked toward boosting growth (perhaps at the expense of some of the goals pursued by the previous regime). As a result, business investment picked up noticeably, likely posting a real gain of about 6 percent in 2017, helping to drive a more favorable real GDP gain (probably around 2.5 percent).

Of course, the other key economic policy development in 2017 was the passage of tax reform in December. The package was far from perfect (they always are), but especially the corporate tax reform hit many of the areas that economists have suggested needed improvement (lower marginal rates, a territorial system and perhaps most importantly for boosting investment, full expensing of capital spending).

In the wake of the tax reform passage, a flood of firms have announced initiatives to boost spending on investment, add workers and offer pay hikes and/or bonuses.

While many other things went right last year that the Trump administration may have had little or nothing to do with, a number of firms have specifically cited a more favorable and predictable regulatory environment as well as the long-awaited reform of the corporate tax code as catalysts for their decisions.

Thus, as we head into 2018, the economy appears to be gathering momentum. Real GDP increases may average 3 percent this year, which would be the best performance since the mid-2000s. There is plenty that could go wrong this year, and even the policy arena may offer some speed bumps (recent news of tariff hikes come to mind).

But the economy appears poised for a massive burst in business investment in 2018, powering growth and hopefully making workers more productive. While there is almost never one single explanation for an economy’s performance, there should be little doubt that a shift in the policy approach played a significant role in the upgraded prospects for the U.S. economy.

Stephen Stanley is the chief economist for Amherst Pierpont Securities, a broker dealer providing institutional and middle-market clients with access to fixed-income products. The views expressed are his own and not the views of Amherst Pierpont.