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There is little chance that economic growth will stall out entirely before the end of July, when the current expansion that began in mid-2009 would officially become the longest on record, eclipsing the 120-month period of growth that lasted from 1991 to 2001, during the dot-com boom.
Most of the current expansion happened under President Barack Obama. But Trump has not been shy about claiming full credit for the economy, repeatedly bragging about declines in unemployment that have persisted for a decade. So if the expansion officially tops the record books this summer, Trump will almost certainly look to take credit.
But lagging consumer and business confidence, rising consumer delinquencies and a shocking drop in retail sales in December — as the shutdown raged and markets swooned — has economists expecting growth of under 2 percent for the fourth quarter of 2018 and around 2 percent for this year. The 2019 numbers could go even lower if Washington emerges as a center of worry again later this year.
“The shutdown fight hurt Trump and he owns it. One million households paid the cost,” said David Kotok, chief investment officer at Cumberland Advisors. “Trump has little room left for another loss and the clock is ticking.”
Fear of market and economic consequences helped drive Trump into accepting a spending deal last week that included far less than he wanted for his beloved border wall. Instead of prolonging the damage, Trump decided to move the fight into the courts and out of the realm of shutdowns. The same constraints could further hamper him as the year moves on, possibly driving him to accept a less robust trade agreement with China than he otherwise might have.
Trump has hinted repeatedly in recent days that if he feels enough progress has been made with China, he could extend a March 1 deadline for cutting a deal. If no deal is reached by then, Trump previously promised to boost current tariffs on imports from China to 25 percent from 10 percent. And he’s talked about adding tariffs on $267 billion more in Chinese imports, which would cover essentially everything China exports to the U.S.>
The trouble is, every time Trump rattles the saber on China and it appears no deal will be made, Wall Street tends to sell off. And markets usually rise on any signal that a deal is near.
The president watches daily market moves very closely and loves to celebrate positive news, suggesting he may feel forced to cut a deal, even one that fails to achieve the enormous structural changes he is seeking from the Chinese.
Manufacturing is also slowing in the U.S., possibly in part because of the trade battle with China. That’s something Trump — who based his 2016 campaign largely on bringing back manufacturing jobs — cannot allow to continue.
“I think this a big part of the reason why he is making warm noises about trade,” said Ian Shepherdson of Pantheon Macroeconomics. “He needs to make a deal now, even if it’s just woolly promises from China not to keep stealing U.S. intellectual property. Because he can’t be seen to be allowing a short-term manufacturing downturn to morph into a long-term slump, for which he will get the blame.”
Trump would also risk serious economic and market dislocation if he pushes ahead with his long-threatened tariffs of as much as 25 percent on imported automobiles and auto parts. The U.S. auto industry has lobbied hard against the tariffs, and few inside the White House view them as good economic policy. A senior administration official suggested Trump is more likely to keep the threat of tariffs as a weapon in future trade talks rather than roll them out anytime soon.
The same constraints hold true for Trump when it comes to dealing with a Congress partially under Democratic control on funding for the wall and other priorities. The government shutdown in December slammed both Trump’s approval rating and dramatically increased the risk that economic growth could grind to a halt. >
The University of Michigan’s consumer sentiment index dropped to 90.7 in January, the lowest level in over two years. Confidence among small businesses also dropped to its lowest level since before the 2016 election. Uncertainty among small businesses measured by the National Federation of Independent Business rose to the fifth-highest level in the survey’s 45-year history.
Trump’s approval rating as measured by Gallup dipped to 37 percent during the shutdown, bouncing back to 44 percent after he signed legislation ending the impasse. During the shutdown, 44 percent of Americans said they thought economic conditions were improving. That number bounced to 54 percent after the shutdown.
All these numbers suggest that when Trump is presented with his next opportunity to use leverage to get what he wants from Congress, he will likely have to take a pass. The next big moment will come sometime this summer, when Treasury runs out of room to borrow money under the debt limit to pay the nation’s bills.
The debt limit goes back into effect on March 2 and will likely be at about $22 trillion. Most estimates put the so-called X date, when Congress must raise the debt limit to avoid catastrophic default, sometime in mid-summer.
At that point, Trump might be tempted to seek more wall money in return for a debt limit hike, and Republicans might seek to force spending cuts given the soaring deficit, which swelled to nearly $800 billion in 2018. But even flirting with a debt limit crisis could tip an already shaky economy into turmoil while tanking markets, tying Trump’s hands.
The same would also be the case in October, when Congress will have to reach another spending deal to avoid painful automatic budget cuts. If there is a debt limit scare or shutdown, it will likely hit growth, and Trump will get the blame. “Anything negative the president does now can be used against him if growth keeps weakening,” said Jim O’Sullivan of High Frequency Economics.>
China and the debt limit are not the only risks to the economy as Trump heads toward a difficult reelection fight in 2020. So far, he’s largely gotten what he’s wanted from the Federal Reserve, which paused its campaign of interest-rate hikes as growth slowed and markets wobbled late last year.
But rates are already rising, and the Fed could feel pressured to hike them further if a tight labor market starts to drive up wages and prices more quickly, possibly clamping down further on growth.
Unrest in the Middle East or in Venezuela could impact already-volatile oil prices. And a slowdown in corporate earnings and business investment, as the impact of tax cuts fades, is also a concern cited by many economists.
But some of the biggest threats — a China trade war and big fiscal fights in the U.S. — are ones over which Trump has significant control. And his best bet may be to do nothing, according to Shepherdson. “Trump just needs to keep out of the way,” he said.