Tight Job Market, Deficit Could Pose Challenge for Trump

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We got three pieces of data this week that could inform the Trump administration's plans. I'm here with Bob Johnson, he is our director of economic analysis, for what he thinks the impact could be.

Bob, thanks for joining me.

Bob Johnson: It's great to be here today.

Glaser: Let's start with the small-business owners who seem to be very optimistic about a Trump administration and what that means for the business landscape. What did that data show this week?

Johnson: Yeah, absolutely. I think the report is always an interesting one, but we always have to be careful with this one. This one has got some statistical issues with it and kind of a small sample size. But nevertheless, this has been a group that's been very gloomy for a very long period of time. For most of the recovery the readings have been in the low to mid 90s; 100 is kind of considered normal. And all of a sudden, we popped from the low 90s to 106 in a single month after the Trump election. So, clearly, the small businessmen are very excited. But like the stock market, it seems to me it's a little bit more of a sentiment than necessarily reality.

Glaser: When you look at some of the underlying indexes in this report, the actual business conditions, there has been no improvement there yet?

Johnson: Well, you know what, the numbers don't necessarily look radically changed. I think it's a lot of things. How do things look in a few months from now? Is it a good time to start a business? Those types of questions that are more touchy-feely did particularly well. The one part of the report that we do like to look at, despite statistical issues with the general report, is the number of people saying that it's hard to fill positions. That number actually ticked down a little bit. I mean, not badly, not indicating any big problem. But certainly, it wasn't one of the big driving forces that popped the number to 106. So, clearly, even here we've got to be a little careful that people are optimistic about what he will do, but right now, what they are seeing isn't necessarily quite as great as this number might indicate.

Glaser: Looking at things that the Trump administration is planning on doing, there has been talk of infrastructure spending, of tax reform that hits the deficit, and we've got to look at what the deficit will look like as he takes office. And you see some things in that number that give you concern?

Johnson: Right. We've gotten off to a little bit of a bad start. We got a report this week on the first three months of the fiscal year, and we've been waiting desperately to get the December numbers because that's the first month where you really have corporate tax payments due and you get some individual tax payments due. So, those are all key things and really, in October-November, we were kind of guessing it.

So, now that we've got the full set of numbers, there's some good news. On the expenditure side, growth is only about 3%. So, we're under control there like we have been for a few years, really not growing that number very much as defense spending remains muted, and a lot of other programs, especially the ones away from the social programs, actually shrink a little bit. So, good news there.

However, the bad news: the deficit got considerably wider this time around, and the reason was revenues were so poor. Particularly, corporate taxes were down about $10 billion from the same period a year ago. So that was certainly a little bit of a cause for concern for us. Maybe he will have some tax reform that brings in some more corporate tax revenues, but it certainly looks like we'll need a little bit of help there. And we've been saying for months that, well, maybe once we lapped this one period where they had the law change and where people sent their checks in too far in advance and then had to collect that back out again in corporate tax. We're getting kind of beyond that point right now, and I'm a little afraid the corporate tax number is really worrisome about the deficit in the period ahead.

And then on the individual side, the payroll taxes are doing quite well, growing in the 5% to 6% range which is good and maybe even accelerating a little bit based on maybe some of the better job market and wage growth we've seen. On the other hand, we've seen total income taxes actually go down a little bit. And again, that's because people that are either in small businesses, or stock market profits are less than they used to be and, those items are weighing on those items. So, we're really not seeing much growth in individual tax, which is the larger category, either. And so, that's certainly got some ramifications as we look ahead.

Glaser: You ave some concerns about the deficit. Certainly, a lot of that spending is around maybe getting more jobs. But you think that's in a place where the job market actually is already pretty tight?

Johnson: Yeah, absolutely. I mean, I think a lot of people talk about the stimulus and more infrastructure spending. That may not be the world's greatest idea in a labor market that's as tight as it is. And certainly, we've got the JOLTS report this month, which wasn't a radical change from past data, but it continued to show a situation where we've got more job openings than we have actual hires, and that gap remains relatively wide. And the number of job openings did increase a little bit last month, still below some of the really peak months of 2016. But nevertheless, a very good month again for openings indicating that the problem we saw in the labor report last week with relatively slow job growth is probably because of a lack of workers and not because of a lack of jobs.

Glaser: Overall, do you think some of the optimism that's in the stock market and small businesses and other sentiment indicators, is it getting ahead of itself? Do you think some of these programs are actually going to be harder to implement than it may seem?

Johnson: Absolutely. I think the programs always--even in very good programs with a lot support--it always takes time to work through the details, and that's certainly a big problem. And then on the other hand, you've got some of the initial things like higher interest rates and trade issues that are kind of budding right now that are going to hurt short-term results before all the benefits of these longer-term programs. And now even some of those longer-term benefits of those programs are a little bit under question.

Glaser: Bob, as always, thank you for your analysis.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.