Things look great before they're not.
The Trump economy is quite the party. Stocks are soaring, jobs are easy to come by, and incomes continue to rise across the U.S. Yet, September’s IBD/TIPP poll, one of only two polls to correctly predict the 2016 election, is playing party crasher. Of the three items polled, Six-Month Economic Outlook, Personal Financial Outlook, and Confidence in Federal Economic Policies, all fell. The IBD poll was quick to note the relation between the Trump’s tumultuous summer and current economic forecast.
So who dropped the ladle in the punch?
The IBD/TIPP poll points an economics lesson — the importance of expectations. Expectations anchor economic reality because of how people perceive their available options. When expectations shift, so will the economy. “The question is,” as IBD’s Commentary Editor Terry Jones puts it, “was it just a bad month or a real turn in sentiment?”
Congruent to the release of the September forecast, the Federal Reserve concluded its annual summit at Jackson Hole, Wyoming. Trump appointee Jerome Powell gave the keynote speech, wherein he reminded the audience of the importance of “anchored expectations” in the midst of a strong economy. With the market on a record-breaking 10-year bull run, expectations matter more than ever. Positive sentiment is carrying us further than ever, apparently.
The psychological role of optimism in an economy is hardly a science. Powell referred to managing the economy as sailing by the stars with instruments that are often “imprecise and subject to further revision.” Many, including The American Spectator’s Ben Stein, noted the optimism created in Wall Street and Main Street by Trump’s arrival on Pennsylvania Avenue. Two years later, however, sentiments could be turning.
Trump’s economic record is great, but not exceptional. Positive economic indicators like new trade deals or higher incomes, furthermore, gloss over fundamental problems. The U.S. economy stands in a precariously similar situation to that of 2008. Household and business debt levels are higher than ever while bubbles are forming in numerous markets. Again, expectations are built upon future forecasts. When consumers square the White House’s volatility with their financial situation, expectations will adjust.
If the IBD/TIPP poll is any indication, DJ Trump’s song selection may be killing the mood.
By Peder Severin Krøyer - photo by UFA66, Public Domain, https://commons.wikimedia.org/w/index.php?curid=26417976