Danger Signs For Trump, GOP On The Economic Horizon

Donald Trump’s approval rating has hovered in the low 40s for virtually his entire presidency and the recent government shutdown has resulted in his lowest approval rating so far, according to Morning Consult, and stands at 34% according to The Associated Press-NORC Center for Public Affairs Research. While other presidents have polled in this range at this point in their first term and still went on to get re-elected, all of them had shown the ability to at least raise those numbers above the low forties earlier in their term, something Trump has shown an inability to do. In addition, a majority of Americans currently say they will “definitely not” vote for Trump for re-election.

This is all happening even as the American economy is, statistically speaking, performing superbly. Unemployment levels are near historic lows and the January employment report showed an impressive and well above consensus 304,000 new jobs created, somewhat offset by a downward revision of 70,000 for the prior two months. In addition, real wage growth continued to increase, with nominal growth of 3.2% for the prior year and real wage growth of 0.6% for December, the last month for which we have inflation-adjusted data.

The economy has been a source of pride for Trump, as he constantly touts the low unemployment numbers in his speeches. In his State of the Union message, Trump touted the US as having “far and away the hottest economy anywhere in the world.” While that is, of course, false, China, India, and other developing countries having far higher growth rates, there is a grain of truth hidden in Trump’s usual hyperbole. When compared with the world’s major economies overall, the US appears to be in pretty good shape.

Yet, there are clear signs of struggle in the US economy. Trump’s tariffs have hit the Midwest particularly hard, increasing farm foreclosures and hurting manufacturers who rely on foreign steel and aluminum, threatening passage of Trump’s renegotiated NAFTA deal. In addition, because of the fateful Trump administration decision to juice take-home pay in the aftermath of the corporate tax cut by decreasing withholding rates as well as the effects of the reduction of the SALT deduction, a majority of taxpayers are seeing much smaller tax refunds this year than they are used to. That will definitely create a drag on spending through the first part of this year.

While China still has robust growth, it has slowed considerably lately. Consumption tax revenue cratered in the last quarter of 2018, falling over 60% on a year-over-year basis. Yields have fallen to the point where US Treasuries are competitive, fostering some capital flight and the trade war with the US is adding to weakness in the job market. Chinese authorities are loathe to repeat another round of stimulus as they did in 2017 which would be probably less effective anyway as the country’s banks are still over-leveraged.

Europe is in even worse shape. Last week, the European Commission drastically reduced its growth forecast for 2019 and 2020, cutting it to a paltry 1.3% for this year. Germany, the engine of the Euro economy, posted its slowest growth since 2013 last year. The forecasted growth for Italy in 2019 was also cut to a five year low and France is dealing with the “yellow jacket” protests. On top of all this lies the uncertainty over Brexit which seems poised to extend beyond the March 29th date for resolution. Lastly, Europe’s economy is also being dragged down by the Chinese slowdown and Trump’s tariffs.

Paul Krugman is predicting a global recession in the next year or two, while providing the caveat that predicting recessions is a fool’s errand. Says Krugman, “I think that there is a quite good chance that we will have a recession late this year (or) next year”, driven by economic headwinds including the slowdown in the world economy that we are already seeing. However, Krugman’s bigger fear is that, if that recession comes, “we don’t have an effective response if stuff slows down”.

Normally, the higher nominal wage growth would have increased the appetite at the Fed to pursue their plans for the further rate hikes that they planned for 2019. However, these recent events in the world markets, combined with the government shutdown and worries about the stability of the corporate bond market, produced a remarkable change in attitude at the Fed which now believes it has the “luxury of patience” in raising rates from the current range of 2.25 to 2.5 percent. In addition, the Fed also announced the suspension of its unwinding of its bond portfolio which it had accumulated under its quantitative easing program prompted by the Great Recession.

Krugman’s worry is that policy makers may actually be in a worse position to deal with a recession than they were in 2008. Trump and the GOP have already expended their political capital on a useless tax cut that primarily went to the top 1% and will add at least $2 trillion to the debt over the next decade. The Fed has little room to cut rates to begin with and, at these already low levels, they are likely to have little effect in any case. In addition, the Fed will also be loathe to begin another round of quantitative easing before they have been unable to unwind their holdings from the last time they were forced to use that tool. And, with other major economies under similar strain, it is hard to see where growth could come from.

For Trump and the Republicans, this presents a real danger for 2020. For most voters, it is not the actual strength of the economy in an election year that counts as much as the trajectory of the economy. Even a slightly deteriorating economy could be fatal for a President with such consistently low approval ratings and such strong sentiment against him. Trump, the self-avowed “king of debt”, might be persuaded to pursue a real infrastructure plan in order to produce some fiscal stimulus and we all know that the phony deficit hawks in the GOP would go along if they thought it would save their jobs. But to do so would require giving enormous leverage to Nancy Pelosi and House Democrats in order to actually get something passed, which would presumably include higher taxes on the rich. For Trump and the GOP, their re-election in 2020 may depend on whether they are willing to accept that.