The US has an institution which measures recessions and expansions. It is the National Bureau of Economic Research (NBER).
In reality, the NBER is a private think tank which, beyond carrying out research, gives scholarships to external researchers. And, among its functions, is that of being the archive of economic cycles. Just as the risk assessment agencies are Nationally Recognised Statistics Ratings Organisations (NRSRO) which means that, depending on their ratings, regulated financial institutions can or not invest in determined categories of assets, the NBER decides when recessions begin and end. An to do that, it uses a system which uses the classic definition of a recession as a fall in GDP in two consecutive quarters.
According to the NBER, the US emerged from the last recession in June 2009. Thus the current expansion has already lasted nine and a half years. That´s 114 months. If it lasts until May next year, it will become the longest expansionary cycle recognised by the NBER, breaking the record for expansion between 1991 and 2001.
And no-one doubts that the expansion will continue. The US is in full employment, but the inflationary pressures, for now at least, are minimal. Its public deficit is growing, thanks to a policy of cutting taxes and increasing spending, but still remains at 3.5% of GDP. And its trade deficit, to which economists attach no importance, but the resident of the White House does, is also growing, despite the successive waves of trade wars Washington has launched against China. In fact, it is increasing in large part because the fiscal expansion is increasing consumption in the US to such an extent that imports have to be increased.
Since the era of Ronald Reagan, the world´s first economy has spent more than it produces, and also more than it saves. And, as long as it does not correct this, the trade and current account deficits of this country will continue to exist, as often says Martin Marron, Ceo of JP Morgan for the Americas. It doesn´t matter what tariffs are imposed or threats made. The Americans want to consume everything. China saves and produces; the US spends and consumes. This is how the global economy has functioned for the last decade and a half.
Therefore, when we are at the point of achieving the longest expansion of 11 years (NBER´s statistics go back to June 1857), the imbalances in the US are beginning to accumulate. The most striking point is that this process does not result from the dynamics of the expansion itself, but rather from factors of political economy. The increase in the deficit is the consequence of adopting a pro-cyclical policy which no economist who was not an ideologue would demand in this moment of expansion. The same is happening with the absence of structural reforms, eg in education where the US is accumulating ever more problems with its unskilled work force. When Donald Trump arrived in the White House, his advisors spoke much about inporting into the US the German model of professional training.
But those plans were quickly destroyed by the nomination of Betsy DeVoss – multi-millionaire sister of Eric Prince, founder of the mercenaries company Blackwater, which then changed its name to Academi – as Education Secretary. DeVoss has no experience in public policy. The only reason to give her the position was as a reward for her economic contributions to the Republic Party in general and specifically the campaign of Donald Trump.
So is the recovery going to end in 2019? Trump´s objective is to avoid this, again by the simplest method: cut taxes and increase spending. It is a formula which enjoys the support of the Republican Party. But now the Democrats are in control of the House of Representatives. Will they play ball?
Tax cuts will be very difficult. But not impossible, at least in theory. Many of the Democrats who are going to arrive in Washington in January, when the new Congress will constituted, come from conservative areas, and Trump should have no problems in persuading them to vote with the Republicans. But there is a simpler option: increase spending. And here one of Trump´s star projects of the election campaign, which has not gone anywhere since he arrived in the White House, could play a key role: investment in infrastructure.
The state of infrastructure in the largest economy in the world is catastrophic. It is something, moreover, which benefits both major parties. It generates economic activity and jobs – which also benefits the unions – as well as being visible. In Washington many believe that if a serious infrastructure plan is launched, we are going to see Donald Trump inaugurating various times the beginning of works on the same bridge. It is possible. But this doesn’t mean that in the end the bridge won´t be built. With the US economic model, moreover,infrastructure projects are an impressive system for buying and selling political favours, because they are usually carried out by Public-Private Partnerships (PPP), which means that the private sector often secures state guarantees for emitting debt to finance the works. At the same time, this leads to systems of financial engineering which doesn´t necessarily construct motorways, but does generate profits.
It is clear that this is one of the problems of infrastructure projects in the US: the sharing of costs. In fact, the Trump administration has already launched a programme like this months ago, but it didn´t go anywhere. The reason for the failure was firstly that the White House unashamedly benefitted republican states – something that Congress had already done with tax cuts in 2017 – and secondly because it passed on practically all the costs of the public works to the states. It was too much. Even more so in election year. Thus the project didn´t even get discussed in Congress.
Now, however, a different plan, which doesn´t favour some at the expense of others, could work. Even more because the Democrats are going to reduce Trump´s increase in defence spending, which raises the need for them to find another way of maintaining the economic stimulus the Pentagon would have implied. Moreover, it is very likely that the economy will begin to slow at the beginning of 2019 as the stimulus from last year´s tax cuts disappears.
In fact, it was to approve this tax cut and the stock market stopped rising. We are in November and the Dow Jones is where it was in January. Apart from that, the Federal Reserve is going to raise interest rates next month. And it will continue to do so during 2019. The chairman of the central bank, Jay Powell, has already said that he doesn´t know where interest rates will be in balance, or, that the price of money will continue to rise. Add to this the progressive sale of assets by the Fed to reduce its balance sheet and the US economy seems destined to slow, to the extent that the fiscal expansion will disappear and monetary contraction will be more accentuated.
Finally there is another factor: the Democrat Party is panicked that Trump will begin to say, once this slowing starts, that is the fault of the Democrats. “They´ve just arrived in the House and the economy begins to slow. BAD” would be a typical tweet that the President could post at seven o´clock in the morning in Washington and before midday it would have received 50,000 “likes”.
Paradoxically, the Democrat victory could launch an infrastructure plan which solves what in the US is a structural problem and extend even further an expansion which is about to beat all records for duration. Politics creates strange bed fellows. In this case it could also create strange works fellows.