The media hype surrounding any US Presidential election campaign doesn’t, in general, encourage serious economic analysis. The astonishing psychodrama of this epic 2016 contest – which reached a new peak, perhaps, during last week’s final television debate – is drowning out almost any meaningful narrative regarding the state of the US economy.
The world is fixated, of course, on the brutal battle between Donald Trump and Hillary Clinton. This marathon race for the White House, between two incredibly divisive candidates, has cut fissures across the American electorate far deeper than those that have long existed. And there’s still over two weeks to go.
Numerous Republicans are shunning the tasteless buffoonery of “The Donald”. Countless Democrats, meanwhile, are turned off by Hillary’s “machine politics” and years of sucking up to Wall Street, as many voters hesitate to revert to type. With the betting markets showing an 80pc chance of a Clinton victory, though, the world’s most powerful job is now surely hers to lose.
Having said that, there are millions of Trump supporters not captured by the pollsters, because they’re voting for the first time in years or simply “ain’t sayin’”. The permatan reality TV star, for all his absurdity, is also a fighter – and many Americans love a fighter. And while Trump’s core supporters are passionate, many of Clinton’s are reluctant. After Brexit, no-one should take this US election for granted. On a low turn-out, Trump could yet cause a shock on 8th November.
What isn’t surprising, to those who’ve been watching, is that the American economy is weak. Growth and jobs are stalling. Housing-building was down 9pc in September compared to the same month the year before, hitting an 18-month low. The US car market, another traditionally strong sector, is also flat-lining – despite heavy price-discounts.
Consumer spending overall, accounting for two-thirds of America’s economy, is fragile – with ordinary households disconcerted by endless political mudslinging. The University of Michigan’s bellwether Consumer Sentiment Survey fell to its lowest level in a year in October, registering a fourth decline in five months. And a respected national survey of small businesses showed optimism falling for three successive months, extending an 18-month downward trend.
The American economy grew 2.7pc in 2013, falling to 2.5pc the following year and 1.9pc in 2015. So far, this year, real GDP growth has averaged just a shade over 1pc, and could fall yet lower in 2017. Inflation, meanwhile, is rising. Consumer prices recorded their biggest gain in five months in September, rising 1.5pc year-on-year, compared to 1.1pc the month before.
Economists have a term for falling growth and rising prices – stagflation. This self-reinforcing, confidence-sapping phenomena cuts into real incomes and profits, stymying spending and investment, so harming growth further. We’re not into such a downward spiral yet but, amidst the political barbs and razzmatazz, the world’s biggest economy isn’t looking good.
There is practically no chance of the Federal Reserve raising interest rates when officials gather for their November meeting in 10 days’ time. Moving just ahead of a Presidential election is out of the question. The vast majority of economists, though, expect the Fed to raise rates in December, despite weak growth. Such an increase, if it happens, won’t be because inflation is rising, or for any other data-driven reason. It’ll be because for the US central bank not to raise rates this year would be a serious blow to its credibility.
In December 2015, the Fed put up rates for the first time in almost a decade, upping its “target band” from 0.25pc to 0.5pc. The official talk was of “three or four further rate rises during 2016” but, as this column said at the time, that was never likely to happen. One reason was on-going sluggish growth, with the US economy “unable to stand” another rate increase. But the main consideration was that, with financial markets addicted to ultra-loose money, and super-low rates, another rise would cause a panic, resulting in an almighty crash.
The widespread assumption that US rates will go up in December, especially if Clinton wins, is already priced-in to the US dollar, of course. That helps explain, along with the UK’s vast current account deficit and signs of easier British fiscal policy, why the dollar has been trading at its strongest level against sterling since 1985.
In addition, given the extent of the current political argy-bargy, a Clinton victory and the related calm after the uncertainty storm is also expected to drive the US currency higher throughout December and into the new year, once the vote has happened and the rhetorical slugfest has passed.
I’m not so sure. For one thing, if the Democrats do particularly well on polling day, and as well as Clinton winning the Republicans lose control of the Senate and even the House of Representatives, markets could take fright. The party’s control of all three Washington power-centres could result in a slew of growth-challenging policies, including higher tax and regulation – which would hit not only American stocks, but also the US currency.
I also maintain that, for all the Fed’s bluster, with various officially-sponsored luminaries now openly predicting a December rise, the chances are they won’t do it. The economy is simply too weak and financial markets remain too febrile. If the Fed hikes, there could be a panic. If the Fed doesn’t hike, again, there could be a panic. Better, then, to find an excuse not to raise rates – be it “China”, “security concerns”, anything weird enough to not raise too many awkward questions – and we all carry on as we are. I’d put the probability of a US rate rise in December at under 50pc. And if the Fed stays put, and opinion hardens that it won’t raise for a while, then the dollar could start to return from the stratosphere.
Whoever wins this US election, it’s clear that, around the world, more and more doubts are being raised about the on-going reliance on unconventional monetary policies and negative real interest rates. While Trump has railed against such practices, they will come under serious scrutiny whoever is in the White House.
The influential Bank for International Settlements wrote in its latest Quarterly Review that monetary policy is now “overburdened” and a “potential threat to financial stability”. US investment guru Bill Gross now says “central bankers are threatening the engine of the economy by keeping interest rates too low for too long”, concluding that “this cannot end well”.
Here in the UK, Prime Minister Theresa May has also started laying into quantitative easing, criticizing the rise in inequality caused by asset-boosting money-printing and rates that penalize ordinary savers. And Sir Martin Jacomb, a former Chairman of the Prudential and noted City grandee, says rock-bottom rates are now “causing great harm” to companies and households.
What’s really needed, after this US election madness, is for America, Japan, the Eurozone and UK to get together and agree to a coordinated rate rise – to signal the start of a return to normality. But I doubt it will happen.
A new President Clinton, buoyed by hubris, will sanction yet more “extend and pretend”. Fed rates will likely stay where they are. Other countries will respond in kind, also refusing to raise rates and maybe doing more QE, lest their currencies lose competitiveness, pumping asset prices ever higher.
“This cannot end well,” as Bill Gross says. Expect a harsher, more extreme Trump-equivalent to stand for President in 2021.