Weekly Notes

Growing Recession Risks Could Make Trump Even Less Stable

In recent weeks, new challenges have emerged to the conventional wisdom that the US economy is largely doing fine. Growth is projected to significantly decelerate this year, with first quarter growth seen at only 0.4% by the Atlanta Fed and 0.9% by Goldman Sachs. Manufacturing output, a key leading indicator of economic activity, has fallen significantly over the past six months, and four major manufacturing indicators (ISM PMIMarkit PMIPhilly Fed, and Empire State Fed) now show US industrial activity at its lowest level since late 2016. Finally, the most widely trusted recession indicator in the financial markets - the yield curve - is now at its flattest level (indicating its highest recession probability) since 2008, and the NY Fed's recession model shows a 24% chance of recession in the next 12 months, an alarming reading considering that over the past 40 years there has always been a recession within 12 months when the model has reached 28%.

An economic downturn, accompanied by a loss in confidence in the economy among the public, could significantly harm Trump's chances in 2020. While the President continues to have the consistently lowest first term approval rating in the post-World War 2 period, it has been kept above disaster territory by relatively strong approval of his economic management. For example, March's Ipsos poll showed his net approval at -13, but his net economic approval at +6. If such a downturn were to happen, therefore, the bottom could easily fall out on his Presidency, and a serious primary challenge could be undertaken against the President. As a result, as the economy continues to weaken, we'll likely see a more unstable and increasingly erratic Trump, who will try ever harder to please his base with even more reckless policies in an attempt to hide the slowing economy.

Weekly Notes On The Economy is a weekly column that NDN writes on the most recent economic news, policy, and data.

With Growth Slowing, Trump Releases A Budget Devoid From Reality

This morning, the Trump administration released their budget request for 2020 and with it their economic projections for the next decade. Unfortunately, the document reads more like a Trump rally speech than a serious piece of economic literature, and contains projections at odds with virtually every independent analysis. The budget forecasts growth of 3.2% in 2019, even though the Fed, CBO, IMF, and every major bank (Goldman Sachs, JP Morgan, Morgan Stanley, and Bank of America for example) all project that 2019 growth will be 2.5% or less (the average 2019 projection for those seven organizations is just 2.2%). Even more implausible, Trump's budget forecasts that growth will stay at 3% and above through 2023. In reality, the IMF projects that US growth will be closer to 1.4% in 2023, while the CBO forecasts a growth rate of 1.7% in 2023. The administration's fiscal daydream doesn't stop here though. Much of the growth boost in 2018 came from sharply higher budget deficits that boosted aggregate demand (the deficit of 3.9% of GDP in 2018 was the largest deficit when unemployment was under 6% since 1950). Trump's budget, however, sees a budget deficit of 3.7% of GDP by 2023, compared to the CBO's current estimate of 4.6% in that year. What the administration is saying, then, is that they will have double the rate of growth in 2023 compared to CBO projections, while also having less fiscal stimulus than the CBO anticipates (stimulus that would presumably be necessary on an even larger level to achieve anywhere near 3% growth). 

Above all else, today's budget request is a desperate attempt to rewrite the economic narrative of the Trump presidency. Growth is slowing, not rising, and will likely hit its potential rate of 1.8% by 2020. This means that the President's promise that his tax cut would create sustainable long term growth above 3% was a lie. In addition, the budget deficit will continue to grow to unprecedented levels when outside of a recession (and indeed, the deficit for the first four months of FY 2019 is already 77% larger than the first four months of FY 2018). Trump's promise that his tax cut would pay for itself and that he'd balance the budget within his first term in office? Another lie. So far in Trump's presidency, growth has been strong because of a large fiscal stimulus that, while having little effect on long term growth and blowing up the deficit, increased short term growth. Now that the stimulus is wearing off, however, the reality of Trump's poor economic policies is becoming clear, something that could be politically disastrous for him in 2020. 

Weekly Notes On The Economy is a weekly column that NDN writes on the most recent economic news, policy, and data.

Trump's Trade Deal W/China Looks Toothless, 2019 Growth Stagnates

In pursuing his trade war with China, Trump promised American workers and farmers that the tens of billions of dollars lost from reduced export access and higher costs would be made up by a comprehensive deal that dealt with the structural advantages China gave to its own industry. In recent weeks, however, it has become increasingly likely that a potential trade deal with China will not do that, and instead will only involve some increased purchases by the Chinese government. The New York TimesWall Street Journal, and CNBC all report that any language in the deal requiring changes to China's intellectual property or industrial subsidies will likely be too vague to have any real effect, and will have few mechanisms for enforcement. This represents a startling defeat for the President. If Trump only wanted an increase in US exports, he could have simply signed the TPP trade deal on his first day in office, which was projected to increase US exports by over $350 billion annually by 2030 (compared to at most an additional $200 billion in annual exports to China under this deal, although even that would be offset by fewer exports elsewhere due to the resulting appreciation of the US dollar). Instead, he has significantly weakened both the US and global economies for gains that could have been accomplished two years ago. 

Furthermore, while fourth quarter GDP came in above expectations at 2.6% (but still below the White House's "long term projection" of 3%, less than a year after the tax cut), early projections for 2019 growth show a significant reduction in growth. The Atlanta Fed sees only 0.5% growth in the first quarter of 2019, while the New York Fed and Goldman Sachs both project 0.9% growth. These growth downgrades come on the back of new data showing that in February manufacturing activity fell to its lowest level since November 2016. Trump's economic policies are largely responsible for this economic slowdown. His trade policies have led to a significant deceleration of global growth as well as a loss of key demand markets for US manufacturers and farmers, both of which have reduced US exports and production. In addition, his tax cut has now clearly failed to lift business investment as was promised by the administration. Non-defense capital spending today is at a lower level than it was in May 2018, and business investment has grown at an annualized average of 4.4% over the past two quarters, compared to a quarterly annualized average of 6.3% in 2017 before the tax cut was enacted. NDN has written a series challenging Trump's reckless trade policy for its harmful effects on the US and global economies, which you can find here. As well, you can read NDN's work detailing how the overall Trump economy has underperformed the strong Obama economy of 2015-16 here

Weekly Notes On The Economy is a weekly column that NDN writes on the most recent economic news, policy, and data.

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