During the Obama years, Republicans spilled a fair amount of digital ink telling us that the Obama economy was terrible: job growth was weak, the labor force participation rate was declining, and wages were increasing anemically. That entire story changed after Trump was elected: job growth was the best ever, people were re-entering the labor force, and wages were rising at astronomical rates. The reality — as with most things in economics — is more nuanced. First, it’s important to take account of the economy the Obama administration inherited. Second, one must consider that Trump inherited an economy that was already at the tail end of mending, giving him a substantial leg up. The former means that it was harder for the Obama economy to heal while the latter means Trump had the benefit of a tailwind.
In this post, I’ll look at the causes of a recession to explain that, at the beginning of Obama’s term, he inherited an economy that was declining due to the most severe type of recessionary causation. Next, I’ll look at the four primary coincident economic indicators used by the NBER to determine if the economy is in an expansion or contraction (payroll growth, real retail sales, wage growth, and industrial production). The data will show that the Trump economy is marginally better, but that the improvement certainly doesn’t qualify for hyperbolic adjectives.
What causes a recession?
1.) Interest rate increases: here, the Fed raises rates to stave off inflation. Once price pressures subside, the Fed lowers rates. This is best exemplified by the early 1980s recession when Paul Volcker increased short-term rates to nearly 20%. Once he successfully choked-off inflation, he lowered rates. The economy grew at solid rates afterward.
2.) Economic shocks: here, some part of the economy experiences a significant shock, usually in price. Oil prices are the quintessential example, as best explained by Professor James Hamilton who blogs over at Econbrowser.
3.) Debt-deflation: here, an asset bubble is fueled by ever-increasing amounts of debt. Everything is fine until the price of the asset decreases relative to the amount of debt in the system. The drop in the asset’s price causes panic selling, further depressing the asset’s value, eventually causing a recession. The economy is slow to recover because, when the economy starts to grow, consumers must allocate a percentage of their income to paying off the debt accumulated during the asset bubble. This is what caused the Great Depression and the Great Recession. This cycle is explained by Irving Fisher in The Debt Deflation Theory of Great Depressions. This is sometimes called a balance sheet recession.
Obama inherited a recession primarily by number three, but with a contribution from number two, making the recovery particularly difficult.
All that being said, let’s look at the data, starting with payroll growth:
Data from the St. Louis Fred System; author’s calculations
There’s a great deal of noise in the data, so I’ve converted the monthly increase in the 1,000s to a 3, 6, and 12-month moving average. I eyeballed the black line to more or less the beginning of Trump’s term. The jobs market collapsed in 2008-2009 but regained its footing by the 2Q11. The overall pace increased slightly in 2014. There is no meaningful change in the pace of jobs creation once Trump took office.
We see the exact same pattern in real retail sales:
Data from the St. Louis Fred System; author’s calculations
Once again, I’ve converted the monthly data to the 3, 6, and 12-month moving average to remove some of the noise. The large increase in 2010 is a function of the numbers being compared to the collapse in 2009. The Trump administration’s Y/Y percentage gain increased slightly after he took office but has recently dropped. Overall, there’s little difference between the administration.
The wage gains are slightly better under Trump:
The Y/Y percentage gain in wages was very low until a few years ago. The pace remains below the highs of previous expansions. Economists have offered several explanations for weak wage growth: the rise of monopsonies, the decline of unions, and reluctance to ask for an increase given the severity of the previous recession. The Trump administration has attempted to argue rising wages are directly related to tax cuts. This is a difficult sell. Research has shown that the tax cuts had a marginal impact on growth and that the drop in corporate tax cuts was diverted mostly into share buybacks and increasing dividend payouts. The simplest answer is that low unemployment finally forced employers to raise wages.
Data from the St. Louis Fred System; author’s calculation
Industrial production dropped twice over the last 10 years: first during the recession and the second during the oil market drop in 2015. Manufacturing has risen to a modestly higher absolute rate during the Trump administration but is now dropping at a fairly strong rate.
Looking at the coincidental data we get the following: payroll and retail sales growth is very similar between the administrations. Wage growth is most likely a function of timing rather than tax cuts. The only metric that performed better under the Trump administration is industrial production, and that is now dropping due to Trump’s tariff policies.