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Feb 5, 2020

Analysis | The Finance 202: Trump claimed in the State of the Union address he rebooted a failing economy. The facts don't support him, but voters might.

By Tory Newmyer



THE TICKER
President Trump kicked off a rollicking, polarizing State of the Union address with a demonstrably false argument: That he inherited a failing economy from President Obama and executed a swift U-turn.
“In just three short years, we have shattered the mentality of American Decline and we have rejected the downsizing of America’s destiny,” Trump said. "We are moving forward at a pace that was unimaginable just a short time ago, and we are never going back!”
Trump’s fact-defying hyperbole sets up an arguably daunting case to make as he seeks to convince voters he delivered the nation from the “American carnage” he decried in his inaugural address to what his is now touting as the “great American comeback” just three years later.
And he drew boos from Democrats in the chamber when he said if his administration “had not reversed the failed economic policies of the previous administration, the world would not now be witness to America's great economic success.”
To the contrary, many key economic indicators — GDP growth, the unemployment rate, the stock market — show gains in the Trump era have simply continued along their trajectories from the Obama years. Witness GDP growth:

The unemployment rate:

And the S&P 500:

And, we we’ve noted here recently, economic expansion has been slowing. Growth registered at 2.3 percent last year, and the Congressional Budget Office projects it will further settle, to 2.2 percent this year — well below the rate Trump promised to deliver in his first run.
A roughly 2 percent rate of growth is… fine, but unremarkable, especially considering it merely maintains the trend Trump inherited, even after his $1.5 trillion tax cuts. That package, Trump’s signature domestic achievement, has failed to goose business investment, which the tax cuts’ proponents said would lead to productivity gains that spread new prosperity widely. The president’s trade war cast a pall of uncertainty over the economy the business leaders blame for sidelining corporate investments, as this chart from Deutsche Bank Securities demonstrates:

The tax cuts have helped add significantly to federal debt that Trump promised to eliminate entirely over the course of two terms. It’s now projected to rise to record levels as a percentage of gross domestic product in a decade, as the American Enterprise Institute’s Jim Pethokoukis notes:
— James Pethokoukis (@JimPethokoukis) February 5, 2020
Trump nevertheless is riding relatively high. A new Gallup poll shows his approval rating hitting a new high of 49 percent:

That finding is backed up by the latest Washington Post-ABC News poll, which put his approval rating at 44 percent, a high for that survey — buoyed by a 56 approval rating for his economic stewardship, another high watermark in the poll.
“Trump is still a president with an approval rating in the 40s, and that’s not ideal for a reelection campaign,” my colleague Aaron Blake notes, in a wider look at his recent polling. "But he’s also a president who won in 2016 despite only about 4 in 10 people liking him. It’s looking like he’s now objectively in better shape than he was on Election Day 2016. And impeachment appears to have galvanized his base, at least somewhat.”
Consumer confidence has gained steam in recent months, though it is registering a small dip on coronavirus fears, according to Morning Consult’s survey:

The uptick in American sentiment about the economy "comes from the fact that nearly 6.7 million more Americans are employed today than when Trump took office. Monthly job gains were stronger under Obama than Trump, but the labor market has tightened further in recent years, helping more people feel better off,” my colleague Heather Long writes. “A combination of higher wage gains in recent months and Trump’s tax cuts have helped most Americans feel richer, even though many still worry about how to pay for health care, child care and college.”
The gains have been spottier among the working class for whom Trump claimed in his speech to have delivered a “a blue collar boom.”
“Over the last year, the president’s economic policies have not delivered anything close to the miracle that he has promised to white working-class voters in the industrial Midwest. Combined employment in construction, manufacturing and mining grew more slowly last year than at almost any other point in the current expansion,” the New York Times’s Jim Tankersley writes. “Job growth has slowed sharply — from 2.6 percent at the start of 2019 to 1.3 percent at the end of the year — in so-called middle-wage sectors that include mining, construction and transportation, according to calculations by Nick Bunker, an economist at the Indeed Hiring Lab. That blue-collar slowdown is driving the deceleration of job growth across the United States economy.”
You are reading The Finance 202, our must-read tipsheet on where Wall Street meets Washington.
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MARKET MOVERS


Passengers wait at the departure area at an airport in the Philippines while wearing protective masks. (Reuters/Eloisa Lopez)
Coronavirus shows no sign of slowing in China. NYT: "The death toll from the monthlong coronavirus outbreak has continued to climb in China, rising to 490. New cases have surged by double-digit percentages in the past 11 days, with no sign of a slowdown. More people have now died in this epidemic than in the severe acute respiratory syndrome, or SARS, outbreak of 2002-3 in mainland China. During that outbreak, 349 people died in the mainland.
"The new figures from China’s Health Commission on Wednesday showed that 65 people died on Tuesday and that 3,887 more people had been infected. So far, 24,324 people are known to have been infected."
Hong Kong will quarantine travelers from mainland China. That includes "Hong Kong residents and visitors entering via its international airport, as authorities step up efforts to halt the spreading coronavirus outbreak," Bloomberg News's Iain Marlow and Stephen Tan report.
Global economic impact grows. Bloomberg News's Hannah Dormido and Adrian Leung: "Provinces accounting for almost 69% of Chinese GDP will remain closed for more than an extra week after the annual Lunar New Year holiday, shutting factories, shops and restaurants, leaving ships trapped at port, and slamming household spending... Hundreds of major manufacturers have had their links to the global supply chain severed. Robert Bosch GmbH, the world’s largest car-parts maker, had to shutter two factories employing a total of 800 people in Wuhan. Other auto part manufacturers, including Honda Motor Co. Ltd. and Nissan Motor Co. Ltd., have also closed their facilities in Wuhan."
But U.S. stocks keep rising. MarketWatch's Chris Matthews and Sunny Oh: "U.S. stocks finished sharply higher Tuesday as investors weighed stimulus efforts by the People’s Bank of China and actions by Beijing to combat the economic impact of a deadly Asian virus that has claimed hundreds of lives and infected more than 20,000 people.
"The tech-heavy Nasdaq benchmark carved out a new closing record, aided by a surge in shares of Tesla Inc., which have experienced a parabolic climb in the past few trading sessions." The Dow Jones industrial average rose 1.4 percent, and the S&P 500 gained 1.5 percent.
Bloomberg News's Luke Kawa notes the market has had an unusual run of days with major movement in both directions:
imo the big step-back for today isn't that stocks are up big but that stocks have put in 4 /-1% days in the last seven sessions after having not had one in forever
— Luke Kawa (@LJKawa) February 4, 2020

White House economic advisor Larry Kudlow. (Yuri Gripas/Reuters)
Kudlow says coronavirus will delay export "boom": "Trump’s economic advisor Larry Kudlow said ... that the deadly Chinese coronavirus outbreak will delay a surge in exports that is expected to flow from the first 'phase' of the U.S.-China trade deal signed last month," CNBC's Kevin Breuninger reports.
"'It is true the trade deal, the phase one trade deal, the export boom from that trade deal will take longer because of the Chinese virus. That is true,' Kudlow said in a Fox Business Network interview. But Kudlow noted that the Trump administration, which imposed travel restrictions and quarantines in response to the coronavirus last week, still projects 'minimal impact' from the fast-spreading disease."

2020 WATCH


Senator Bernie Sanders (I-Vt.) reacts to Trump's State of the Union address during an event in Manchester, N.H. (Reuters/Brendan McDermid)
Sanders, Buttigieg lead in first Iowa returns. The Post: "In an early Iowa caucus vote count, Sen. Bernie Sanders (I-Vt.) held a slight popular-vote lead, while former South Bend, Ind., mayor Pete Buttigieg led in a measure of state delegates. With 62 percent of precincts counted, Sanders earned 26 percent of the popular vote; Buttigieg hit 25. By both measures, Sen. Elizabeth Warren (D-Mass.) was in third place with 20 percent of the vote, and former vice president Joe Biden placed fourth at 13 percent."
Wall Street might be ok with a Sanders win. Nick Colas, co-founder of DataTrek Research explains, via CNBC's Jeff Cox: "There is a lot of chatter that a Sanders nomination would roil markets, but there’s another way to consider that possibility. Investors may assume that Sanders’ platform of radically remaking American society/commerce will not resonate with voters during a time of relative economic prosperity. That would make [Trump’s] reelection more likely, preserving a market-friendly tone to government policy."
Bloomberg to double spending. The Post's Paul Schwartzman and Michael Scherer: "In the wake of an Iowa caucus debacle that has so far produced no winner, former New York mayor Mike Bloomberg authorized his advisers Tuesday morning to double television spending for his own presidential campaign, as his advisers have become more bullish on his odds of success. The increase represents a massive escalation of what is already the most costly campaign for the Democratic nomination in U.S. history...
"Since entering the race in November, Bloomberg has spent more than $300 million on television and digital advertising, according to Advertising Analytics, an ad-tracking firm."
Bloomberg's campaigning in California also produced this gem, in a back-and-forth with a reporter: 
— Downtown Josh Brown (@ReformedBroker) February 4, 2020

TRUMP TRACKER

TRADE FLY-AROUND:

A Chinese bank employee counts 100-yuan notes and U.S. dollar bills last year. (STR/AFP/Getty Images)
Trump gives OK for tariffs on currency manipulation: "The Trump administration says it will allow companies to pursue tariffs against foreign competitors if they can show those rivals have benefited from currency manipulation in their countries," the Wall Street Journal's Josh Zumbrun reports.
"Under a new regulation published in the Federal Register ... undervalued currencies would be treated as a subsidy that improperly benefits foreign businesses. That will enable U.S. companies to file a complaint seeking a type of remedy known as a countervailing duty. Companies will be able to pursue such tariffs as soon as April 6. The new rule from the Commerce Department would give the administration another tool to pressure foreign practices that it believes qualify as currency manipulation, giving companies a tool for redress. However, seeking countervailing duties can be a slow and arduous process, further complicated by the complexities of measuring whether a given currency is 'undervalued.'"
U.S. considers withdrawing from WTO's purchasing pact: "The U.S. is mulling a plan to withdraw from a global pact worth $1.7 trillion in government contracts, a person familiar with the matter said, in a move that may anger close allies during a delicate moment for trade," Bloomberg's Bryce Baschuk reports.
"Officials in [Trump’s] administration are circulating a draft executive order that would trigger a U.S. exit from the World Trade Organization’s Government Procurement Agreement, or GPA, if the pact isn’t reformed in line with American views, according to the person, who asked not to be identified because discussions are ongoing ... It could also pose problems for Canadian Prime Minister Justin Trudeau, who still needs to broker deals with his political rivals to ensure ratification of the U.S.-Mexico-Canada Agreement; Canada is the only signatory of the updated NAFTA deal that still needs to ratify the free-trade accord. Procurement was a contentious issue in USMCA."
Push to develop Huawei-less 5G is on: "Seeking to blunt the dominance of China’s Huawei Technologies Co., the White House is working with U.S. technology companies to create advanced software for next-generation 5G telecommunications networks," WSJ's Bob Davis and Drew FitzGerald report.
"The plan would build on efforts by some U.S. telecom and technology companies to agree on common engineering standards that would allow 5G software developers to run code on machines that come from nearly any hardware manufacturer. That would reduce, if not eliminate, reliance on Huawei equipment. Companies including Microsoft Corp., Dell Inc. and AT&T Inc. are part of the effort, White House economic adviser Larry Kudlow said."
There is a sense in the upper echelons of Wall Street that discussions within the Trump administration about limiting Americans’ investment in Chinese companies will ultimately lead to nothing.
Bloomberg News
IMPEACHMENT MINUTE: A speed read on the latest from the congressional impeachment process.
"Trump touts economy, immigration policies and foreign relations in State of the Union as Senate impeachment vote nears." By The Post's Felicia Sonmez, Colby Itkowitz, John Wagner and Mike DeBonis
"Democrats use State of the Union rebuttal to pivot from impeachment." By The Post's Rachael Bade

POCKET CHANGE


Shoppers cross a street near a Macy's department store in Columbus, Ohio, in 2017. (Luke Sharrett/Bloomberg)
Macy's to close 125 stores: "Macy’s Inc. plans to close 125 department stores over the next three years, an admission that a fifth of its locations cannot thrive as shoppers buy more online and make fewer trips to malls," WSJ's Suzanne Kapner reports.
"The company is also cutting roughly 2,000 corporate jobs, or 10% of corporate and support staff, and closing several offices. It will abandon a dual headquarters in Cincinnati—a structure Macy’s has kept since 1994 when it was still one of the country’s biggest retailers—and put all headquarters roles in New York. Macy’s, which will keep running about 400 of its namesake stores, is ramping up its restructuring efforts after a yearslong slump. Cobbled together from various regional chains, the company has struggled even as it left the weakest malls and boosted spending on e-commerce."
NYSE owner bids on eBay: "New York Stock Exchange owner Intercontinental Exchange Inc. has made a takeover offer for eBay Inc. that could value the sprawling online marketplace at more than $30 billion, according to people familiar with the matter," WSJ's Cara Lombardo and Corrie Driebusch report.
"Intercontinental Exchange, known as ICE, has approached eBay in the past and did so again recently, the people said. The companies aren’t currently in formal talks and there is no guarantee eBay would agree to a deal. Should there be one, it would be big, given eBay’s market value of more than $28 billion and the premium ICE would likely have to pay."

The Department of Justice Building in Washington. (Manuel Balce Ceneta/File/AP)
DOJ, state AGs discuss Google probe: "State attorneys general investigating Alphabet Inc’s Google unit met ... with U.S. Justice Department officials to coordinate efforts to probe the search and advertising giant, officials told Reuters," Diane Bartz reports.
"The attorneys general of Texas, Utah and Nebraska were among those in attendance. Utah Attorney General Sean Reyes said one goal of the gathering was to coordinate efforts, with the goal of wrapping up the probe by the end of the year."
Former Goldman exec banned from banking: "The Federal Reserve permanently banned former Goldman Sachs Group Inc. banker Andrea Vella from the industry over his alleged involvement in the 1MDB scandal as the fallout reaches higher into the firm’s ranks," Bloomberg's Jesse Hamilton and Max Abelson report.
"The Fed’s order announced ... said Vella, a former co-head of investment banking in Asia, failed to inform Goldman that a businessman who’s allegedly the fraud’s mastermind was involved in 1MDB bond offerings that the bank handled in 2012 and 2013. The U.S. Justice Department has criminally charged other former Goldman employees, including Tim Leissner, who pleaded guilty."

Steve Cohen’s $2.6 billion bid to buy the Mets is on life support — if alive at all. The billionaire hedge fund manager is reportedly ending negotiations with the Wilpons on his purchase of an 80 percent stake in the franchise.
NY Post

CHART TOPPER

Via Adam Tooze, while rich countries tend to have larger middle classes, the U.S. is an exception, with an income distribution more akin to that of China and Russia:
In general, higher median income -> larger middle class (i.e. share of population btw 75% and 200%). The exception is the US which has income distribution more like China, Russia & Turkey. @DeutscheBank via @SoberLook pic.twitter.com/Fw33kguPuI
— Adam Tooze (@adam_tooze) February 4, 2020

DAYBOOK

Today:
  • The Commerce Department releases the latest international trade figures
  • General Motors, Yum! China, Energizer, Merck, GrubHub, Spotify and GoPro are among the notable companies reporting their earnings.
  • The House Financial Services Committee hosts a hearing on efforts to "evade state consumer protections and interest rate caps."
  • The Financial Services Subcommittee on Housing hosts a hearing on Trump administration's "efforts to eliminate public housing."
  • The Urban Institute hosts an event on institutional investors role in the housing market
Thursday:
  • Uber, Kellogg, T-Mobile, Philip Morris International, Fiat Chrysler, Bristol-Myers Squibb, Skechers USA, Yum! Brands, Estee Lauder and the New York Times are among the notable companies reporting their earnings.
Friday:
  • The Labor Department releases the January jobs numbers
  • Honda Motor and AbbVie are among the notable companies reporting their earnings.

THE FUNNIES

And so the battle for the soul of America begins.....https://t.co/DYjVqGWvoA pic.twitter.com/Zk2DNbvfmG
— Matt Wuerker (@wuerker) February 4, 2020

BULL SESSION


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