Two years after the inauguration of Donald Trump. The unemployment rate (3.9%) is the lowest in 40 years, both for the demographic group of white population (3.4%) and for Hispanics (4.4%) and African-Americans (6.6%) . Although Trump inherited an unemployment rate of 4.9% from Obama, the percentage has continued to decrease and the labor participation rate has risen to 63.1%. The monthly generation of employment (274,000 in October, 176,000 in November, 312,000 in December) far exceeds the necessary figure (between 75,000 and 100,000) to accommodate the increase in the active population. In 2018, 2.6 million jobs were generated, exceeding 2.2 million in 2017. It is also worth noting the 3.2% increase in hourly wages in 2018. Despite full employment, inflation has increased by only 2%. , 1% in 2017 to 2.4% in 2018. The tax system reform undertaken by the Tax Cuts and Jobs Act of December 2017 reduced the corporate tax from 35% -the highest among developed countries- to 21% . A primary objective of the reform is to get part of the $ 2 trillion in profits parked by US companies abroad repatriated.
The law stipulates that said capital may return to the US paying a rate of 15.5% for liquid assets and 8% for illiquid assets. In the first quarter of 2018, cash capital worth 300,000 million dollars returned to the US. Although a large part was initially allocated to purchases of own shares or greater dividends for shareholders, some companies have announced substantial productive investments in the US. Amazon will invest 5,000 million dollars and create 50,000 jobs with its two additional locations, one in New York and one in the suburbs of Washington DC. Microsoft will allocate $ 500 million to the construction of affordable housing in the city of Seattle. The tax reform also decreased the income tax for the upper and middle classes, encouraging greater short-term consumption, but raising the deficit and public debt.
The most critical predict that the positive effects of the stimulus will soon disappear, while optimists remind that GDP grew by 3.5% on an annual basis in the third quarter of 2018 after an expansion of 3.2% in the first half. The increase in GDP in 2018 is expected to reach 3%, the highest level in ten years. In the medium term, the US government will have to decide between halting the rise in public debt or extending the tax cuts, which according to the law will disappear in 2025. Only a rise in the sustainable growth rate of the US would allow reconciliation fiscal consolidation with the maintenance of part of the tax benefits.
The Federal Reserve made four increases of 50 basis points of its federal funds interest rate, placing it in a range of 2.25% -2.50%. These rises are due to moderate promotions of wages and inflation. Its positive effect is that they increase the attraction of capital to the US, especially from emerging countries whose economies are not well managed. On the other hand, higher rates affect the many Americans with mortgages, consumer loans or contracted to carry out their university studies. The Fed appears to have ruled out another increase in March 2019. The IMF's growth forecast for the US in 2019 is 2.5%. If the slowdown is not greater, investors expect two or three rate increases in 2019.
The commercial policy of President Trump has aroused much controversy. However, its negotiating team won a new free trade agreement with South Korea that limits steel exports to the United States in a substantial amount. The US-Mexico-Canada agreement raises the content of parts in the assembly of vehicles that must come from one of the three countries from 62.5% to 75%. Also, 40% of the value of vehicles that will continue to benefit from the absence of tariffs must be manufactured by workers whose hourly compensation is at least $ 16. Trump also made concessions to forge the agreement, especially abandoning its requirement of mandatory renegotiation in a period of five years and accepting that its validity is 16 years. The agreement facilitates the access of US companies to the dairy market in Canada, increases labor and environmental regulations and updates the protection of intellectual property rights.
The US-China trade war has caused injury to US farmers, whose income fell by 13% in 2018. But China is further blaming the effects of tariffs. The Shanghai stock index lost 25% in 2018, and the GDP, industrial production and consumer confidence of the second world economy are decreasing substantially. Everything indicates that a partial agreement between the US and China will be sealed before March 1, a circumstance that is spurring the stock markets.
The markets have also discounted the consequences of the rejection of the Brexit agreement in the House of Commons. The most likely scenario is an extension of the negotiations between London and the EC, even after March 29. The IMF predicts that the expansion of world GDP in 2019 will be 3.5%, two tenths less than in 2018 and 2017. If uncertainties are gradually cleared, the US in 2019 will be one of the main locomotives of the world economy.
Alexandre Muns is a Professor at OBS Business School