The recent pandemic is threatening the phase-one trade deal between the US and China. Photo: AFP / Mark Ralston

A near-record February jump in the Philadelphia Federal Reserve Bank’s business outlook index portends a strong comeback in US economic activity during 2020. Of the five diffusion indices compiled by regional Federal Reserve banks, the Philadelphia Index has the strongest predictive value, anticipating the broad purchasing managers’ surveys.

The Trump Administration’s “Phase One” trade deal with China set a positive tone for US economies at the end of 2019, after a year of uncertainty over a possible trade war. “Uncertainty generated by trade negotiations dampened investment, Council of Economic Advisers Acting Chairman Tomas Philipson told a press briefing on the just-released Economic Report of the President, an admission much discussed in financial media. Like banging one’s head against the wall, though, a trade war is the sort of thing that feels good when it stops. The Trump Administration’s long-repeated position downplayed the economic impact of a trade war. I wrote last October that Trump’s declaration of a trade war truce probably secured his re-election.

All the major components of the Philadelphia Index surged with exception of planned capital expenditures.

Trump’s 2017 corporate tax cut boosted growth in 2018, but growth fall from the 3% range to the 2% range during 2019 in part due to the trade war. Employment growth in the US depends overwhelmingly on the investment decisions of larger companies, most of whom are actively globally. Among the smallest US companies, employment growth fell to nearly zero during 2019. The small business sector, which mostly depends on domestic non-tradables, sat 2019 out. The globalized sector of the US economy is generating all the jobs growth. That helps explain why the trade war truce provided such a strong boost to economic activity.