Weekly Notes

Trump Is Leading The Economy Into A Substantial Slowdown

Over the past week, new economic data has painted a picture of a rapidly decelerating US economy. In April, industrial production grew at its slowest rate since February 2017, retail sales declined for the 3rd time in the past 5 months, and capital spending fell by 0.9% to its lowest overall level since June 2018. And this data was compiled before Trump increased tariffs on $200 billion of Chinese goods from 10% to 25%. Since then, the numbers have gotten even worse. In May, US manufacturing production fell to its lowest level in 9 years while overall business activity fell to its lowest level in 3 years. Meanwhile, growth projections for Q2 GDP have fallen rapidly, with the Atlanta Fed, the New York Fed, JP Morgan, and Morgan Stanley all seeing growth under 1.5% this quarter. Indeed, the Fed's preferred metric for forecasting recessions - the yield curve - is now at its flattest point (meaning the highest probability of recession) since 2009. Trump's trade war, and recent significant increase in tariffs, has played a large role in this slowdown. Export markets have dried up for American farmers and manufacturers, investment has declined as firms face significant uncertainty, and higher costs for consumers and producers alike have caused output to slow. You can find more of NDN's analysis on why the economy is currently worse than conventionally believed here. As well, you can read our work detailing the failures of the President's tax cut here and his trade policy here

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

Beyond The Headlines, The Economy Continues To Weaken

This essay originally appeared on Medium.

Over the past two weeks, a new piece of conventional wisdom has taken hold in the media and the White House that the economy is strong again and concerns over growth earlier this year were unfounded. Indeed, Trump likely ordered a significant escalation of his trade war with China based upon his perception that the economy was doing well enough to handle it. The problem, of course, is that this narrative doesn't really appear to be true. It is largely based upon two economic reports whose headlines were very strong but whose underlying data revealed continued weakness in the economy. 

First, the unemployment rate in April hit its lowest level in five decades. While this headline sounds extremely positive, the reason unemployment fell was because 490,000 workers left the labor force after being unable to find jobs. According to the Census Bureau survey that the unemployment rate is derived from, total employment in April actually fell by over 100,000, and 300,000 fewer people have jobs today than they did in December 2018

Second, real GDP rose by 3.2% in the first quarter, far above market estimates in the low twos. Again, the report appears to be very strong, but the underlying data is actually poor. GDP rose significantly because of temporary, one-time boosts from inventories and net exports. The problem is that because these factors were very strong in Q1, they will actually subtract from growth in the rest of the year as firms reduce their inventory levels to deal with slowing demand and net exports fall after they had a large, one-time build-up ahead of the expected imposition of tariffs in March. Meanwhile, the core elements of growth that will affect GDP over the rest of the year, consumer spending and business investment, actually fell to their lowest levels since 2013 in Q1, meaning that growth will likely be around 2% or worse for the rest of the year.

Furthermore, closely-watched reports covering US manufacturing and services production saw major declines in April, consistent with the underlying data in the jobs and GDP reports. Last month, US manufacturing output declined to its lowest level since October 2016 and services production fell to its lowest level since August 2017, while the employment gauges in both reports were near their lowest levels of the past 2 years.

Rather than marking an unexpected uptick in the economy, data over the past month has only confirmed that economic activity continues to slow, as Trump's trade policy harms US manufacturers and farmers and his tax cut fails to provide the sustainable lift to investment that was promised. All of this makes his threats of additional tariffs against China more economically and politically risky, and we will continue to oppose these policies in the days ahead. 

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

Trump Is Beginning To Fold On His Trade Agenda

Since Trump began implementing tariffs on a wide range of nations in March 2018, his commitment to actually seeing through his trade agenda, even in the face of economic and political harm to himself, has been questioned. Indeed, it was widely reported that Trump pressured his economic advisers to wrap up negotiations to help the economy when the stock market suffered a large decline at the end of 2018. In recent weeks, however, clear signs have emerged that Trump is beginning to fold on achieving real concessions in his trade conflicts, in the face of economic and political costs ahead of the 2020 election. The first, and extremely significant, move in this direction by Trump was unilaterally cancelling the March 1 deadline for higher tariffs on Chinese goods , even though no concessions had been made by China. The tariff escalation if a deal had not been made was promoted by the Trump administration as creating significant leverage on the Chinese because of its significantly harmful economic effects, and yet it became clear that Trump was not willing to incur his own domestic economic hardship and simply backed down. Second, new reporting over the past several weeks has shown that US demands for Chinese reforms continue to be watered down, whether that be accepting weaker Chinese IP protections for pharmaceuticals than exist in the US or largely abandoning demands for China to reform industrial subsidies to state-run enterprises.

Why has Trump changed his tune so significantly, when his promise to be tough on America's trading partners was such a big part of his campaign? Probably because he has begun to encounter significant political and economic opposition at home that has him fearful for his 2020 election hopes. On the political front, his trade agenda has encountered increasingly strong opposition from both Democrats and Republicans. Over the weekend, Republican Sen. Chuck Grassley said that the USMCA was dead in Congress unless Trump repealed his steel and aluminum tariffs, while bipartisan bills giving Congress a check on the President's national security authority for imposing tariffs are moving through the House and Senate. On the economy, meanwhile, Trump has seen the large negative effects on the stock market and business confidence that his trade wars have created, and realizes that a strong economy provides probably the only potential path to a 2020 victory. As a result, he's unwilling to repeat the stock markets declines of late 2018, which were caused in large part due to fears of escalating trade conflicts with China and the EU. For all of the bluster and attacks on key US allies, then, what has Trump's trade strategy achieved for Americans? A weakened manufacturing sector and the loss of thousands of jobsseverely worsened relations with our allies in Europe and Asia, and few if any meaningful trade concessions. You can read more about NDN's work challenging Trump's tariffs here

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

While Trump Blames The Fed, The Real Cause Of The Growth Slowdown Is His Trade Policy

On Sunday, Trump once again blamed the Fed and Chairman Jerome Powell for the economic slowdown that has intensified since late 2018, and that will likely see 2019 growth close to 2% rather than the 3%+ promised by the President. If Trump actually wanted to find the culprit for this deceleration, however, he would be wise to take a look in the mirror. Indeed, Trump's protectionist trade policy has created enormous business uncertainty around the world and has led to a steep fall in global trade, causing a decline in both US and global growth. Last week, the IMF downgraded 2019 global growth from 3.5% to 3.3%, and similarly reduced their US growth projection for this year from 2.3% to 2.1%. In their analysis, they cited increasing trade tensions as the top risk to global growth and wrote that a failure to resolve Trump's trade war with China and a potential one with the EU would cause a further economic decline.

Furthermore, CNBC's March Fed Survey saw a downgrade in expected 2019 US growth from 2.45% to 2.3% according to 43 market investors, who blamed global trade conflicts and slowing global growth for the slowdown. Finally, the WTO early this month projected that global trade growth would fall from 3% in 2018 to 2.6% in 2019, significantly below its 2000-2018 average of 3.8%. America has witnessed an unprecedented experiment with protectionist trade policy during the Trump administration, and the results of this experiment are now clear - significantly slower US and global growth, and a large hit to the stability of the rules-based global trading system. You can read more about NDN's work challenging Trump's trade policy here, and find our recent piece about the WTO's legal blow against Trump's tariffs here

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

WTO Strikes A Legal Blow Against Trump's Tariffs

On Friday, the WTO issued a series of rulings that struck at the core legal justification for Trump's steel and aluminum tariffs. The administration had argued that countries can impose tariffs based upon their own interpretation of national security interests, and that whether there actually is a legitimate national security concern can't be arbitrated by international trade courts. In a case not directly involving the United States but clearly aimed at Trump's tariff policies, however, the WTO ruled that countries can't simply impose national security-based tariffs for any reason at all, but instead can only impose them when there are unexpected war-related dangers requiring urgent action that involve interactions between sovereign states. This ruling significantly weakens the arguments that Trump had used to justify the tariffs. They have been imposed upon economies including Canada, Mexico, and the European Union, which clearly don't present "unexpected war-related dangers" (and Mattis in 2017 even said the tariffs weren't needed by the US military for any defense-related activities). Furthermore, US steel and aluminum manufacturers have lost business to private foreign companies, and the vast majority of nations affected do not provide state support to their steel and aluminum industries, so Trump's tariffs also don't involve direct interactions between sovereign states.

As NDN has long argued, Trump's tariffs instead represent an extraordinary abuse of Presidential power, and their imposition violates both US and international law. This ruling only reiterates that the tariffs do not serve a legitimate national security interest, and Congress must now act to rescind this latest violation of Presidential authority. You can read more about NDN's work challenging Trump's tariffs here, and find recent Congressional action towards reining in the tariffs here

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

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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