There is conventional wisdom developing in Washington and on Wall Street that President-elect Donald Trump has been handed a gift when it comes to the US economy. I get it. By most traditional metrics, the economy looks like it’s in good shape: Unemployment is low, GDP growth is strong, and labor productivity has been robust. Any president would want to ride into the White House on the coattails of this kind of expansion, the thinking goes. However, I think the reality is somewhat more complicated in ways that are not so traditional.
For Trump, this economy looks like a mirror image of the one he inherited in 2017. At the start of his first term, there was plenty of room to grow, and the cyclical momentum was turning up. Trump 1.0 came into office at a time of low inflation, some slack in the jobs market, and, importantly, a synchronized upturn in global manufacturing activity: Well over half of the global manufacturing purchasing managers’ index — a private measure of factory activity — stood in expansion territory in early 2017.
This time around, the US economy is operating at a reasonably strong level, but its momentum is slowing. The labor market is cooling, over half of the world’s manufacturing industries are in contraction, and the American consumer is losing steam rather than picking up speed. […]
The final yellow flag in the US economy is real estate. Put simply, housing is a complete mess. America’s housing market simply cannot operate normally with mortgage rates this high. Mortgage purchase demand has been flat since September 2023. Meanwhile, lending standards on residential mortgages have generally been tightening in recent years. By contrast, the last time Trump assumed office, mortgage lending standards were improving. Absent a bigger decline in mortgage rates, I would expect residential investment to remain sluggish over the coming year. […]
For investors, it seems an uphill climb to deliver on the fiscal expectations the bond market has baked in. With the economy in a still challenging spot, there’s probably opportunity in the fixed-income market: Treasury bonds are undervalued. For the financial press, it is worth being honest. Things are not as cut-and-dried as “Trump is inheriting a strong economy.” Across a variety of dimensions, the picture appears quite challenging. After all, if things were so great, why did the incumbent party lose in the first place?
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