The Psychological Economy and The Trump Effect

If youre wondering where the economy is headed, youre not alone. There are enough data, indicators and economists opinions to argue either way. But behavioral economist Robert Shiller thinks Trumps free-spending ways and motivational speaker style of leadership may be leading factors. He has even predicted that, due to the “Trump Effect, the next recession may be “years away.”

Is Shiller right?

Psychology and Attitudes Matter

Perhaps; but not completely. Psychological factors are important. Circumstances can impact the economy, of course, but so can peoples attitude toward the circumstances. Like Ronald Reagan in the 1980s, Donald Trump understands that optimism is contagious. He also knows that belief in success usually precedes successful outcomes.

However, pessimism is also influential in how people think and in driving ultimate outcomes. Thats why Trump has accused his critics in the media and government are trying to “talk” the country into a recession by repeatedly saying were very close to one. Jawboning the economy into contraction for political gain is itself a force that must be countered. That would help explain Trumps constant cheerleading of the economy.

But theres more to economic performance than just psychology and attitudes.

A Mix of Conflicting Economic Forces

There are tremendous forces at work in both the national and global level that usually determine the direction of economy. But the its difficult to recall when there were more conflicting economic data and trends as there are now. That said, there are, in fact, real reasons for the economy to be slowing down at this point in the cycle, but have yet to do so.

Consider, for example, the trade war with China. Conventional economic wisdom says that a trade war diminishes economic growth and often leads to less trade and therefore, less economic activity. Thats proven to be true in certain areas of the economy, such as manufacturing and agriculture.

But the trade war isnt a fixed reality. Like many other economic conditions around the world, its fluid. Whats true today is not necessarily true tomorrow.

Disruptions in supply chains, for instance, have made it difficult for American manufacturing, which, by some measures, is the worst its been since 2009. But at the same time, companies are quickly adapting, finding new supply chains in other locales to make their products. Countries such as Vietnam and Malaysia are quickly replacing China as business-friendly places for American manufacturers. As a result, other reports say that U.S. manufacturing is rebounding. Its not as high as it used to be, but its moving the right direction.

On the agricultural front, the situation hasnt remained static, either. In fact, the dramatic fall in U.S. soybean sales, Americas most valuable export crop, may be short lived. A new partial trade agreement with China could mean a resumption in soybean exports of up to $50 billion per year. That would bring back U.S. farmers back to pre-trade war levels of their Chinese market share.

At the same time, the recurring negative bond yield curve, low inflation, a return to quantitative easing and interest rate cuts are also symptoms of an economy thats in the final stage of a bull market. Quantitative easing is particularly worrisome because its an indication that there is too much debt in the financial system. But even these indicators arent pulling the economy down; at least not yet.

The United States remains at essentially full employment and, even with heavy student loan debt, Millennials spending habits are adding to the demand. But clearly, two of the biggest factors of economic growth or decline are taxes and regulation.

Cutting Taxes and Regulations in All Businesses

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