A Weakening Economy May Be the Biggest Threat to Donald Trump
On Friday morning, the Labor Department released its jobs report for May, which showed a sharp slowdown in hiring. Donald Trump was still in Ireland, preparing to fly back to Washington. He didn’t immediately react to the news that employers created only seventy-five thousand jobs last month, which wasn’t surprising. Trump hates acknowledging negative developments that occur on his watch, and he is surely aware that a slump in the economy could prove disastrous for his reëlection campaign.
Despite all the troubles and strife of his first two and a half years in office, he has been able to point to strong economic growth and a very low unemployment rate as reasons why Americans who aren’t enamored of him personally should support him. If that rationale is removed, what does Trump have left? A weakening economy could well be the biggest political threat he faces.
One month of weak jobs data doesn’t translate into a slump, of course. Despite Friday’s report, which also showed a modest fall in wage growth, most economists think that the economy is still in decent shape. When the National Association for Business Economics surveyed more than fifty economic forecasters recently, the average prediction was that the economy would grow by 2.6 per cent this year and 2.1 per cent in 2020. Such an outcome would represent a slowdown from the 2.9 per cent growth recorded in 2018, but a relatively modest slowdown that is unlikely to present very much of a political threat to Trump. (He’d still have to explain why G.D.P. growth hadn’t reached his target of four per cent, of course.)
However, even before Friday’s employment report, there were worrying signs of softness in other important economic indicators, particularly capital spending by businesses, and also evidence to suggest that this weakness was tied to Trump’s trade wars. As I noted in a column earlier this week about the resignation of Kevin Hassett, the chairman of the Council of Economic Advisers, business surveys show that Trump’s tariff threats, particularly those directed at China, are creating a lot of uncertainty, which is reflected in businesses taking a cautious approach to spending and hiring.
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The Federal Reserve, too, is watching anxiously. “We do not know how or when these issues will be resolved,” its chairman, Jerome Powell, noted in a speech on Tuesday. Powell added that the Fed was “closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion”—a statement which Wall Street took to mean that a cut in interest rates is now a live possibility.
To some people, particularly political foes of Trump, Powell’s statement made it look as if the Fed might be preparing to bail out an irresponsible President. But Powell appears to have been responding primarily to developments in the bond market, where yields on long-term government securities have fallen precipitously in recent weeks—an indication that investors think the economy is considerably weaker than it looks. Although the Fed relies on a wide range of data in setting interest rates, the signal from the market is “something I definitely take into account,” John Williams, the president of the New York Fed and a close ally of Powell, said at the Council on Foreign Relations on Thursday.
In any case, Powell’s verbal intervention didn’t win him plaudits from Trump, who for months has been tearing into him and his colleagues for raising interest rates too aggressively last year. During an interview with Fox News’s Laura Ingraham, in Normandy, France, on Thursday, Trump again targeted Powell, saying, “Who thought he was going to raise interest rates? If we didn’t have that, we’d be at 5.2”—per cent G.D.P. growth—“and the stock market would be up ten thousand points more.”
Trump plucked those figures out of nowhere, of course, and they are completely unrealistic. The U.S. economy hasn’t grown at an annual rate of five per cent for thirty-five years, and even if the Fed had stood pat in the second half of last year, when it raised rates twice, the rate of growth now wouldn’t be anywhere near that figure. It’s equally ridiculous to suggest that, but for Powell and his colleagues, the Dow could be standing at thirty-five thousand.
In fact, the main thing that investors have been fretting about isn’t higher interest rates: it’s the trade war that Trump himself has created. Much as the President would like to shift the blame, the timing of recent movements in the stock market is unambiguous. At the end of April, the S. & P. 500 stock index hit an all-time high. In May, Trump threatened to impose broader tariffs on China and Mexico, and the Dow fell more than six per cent on the month. It was only after Powell signalled that the Fed may step in to support the economy that stocks rebounded.
Trump won’t let reality interfere with his messaging, of course. Having already singled out Powell as his whipping boy for anything that goes wrong in the economy, he is sure to escalate his attacks on the Fed if signs of weakness in the labor market and elsewhere persist. That leaves Powell in a public-relations bind. If the Fed doesn’t move rapidly to cut rates, Trump will assail him. If the Fed does act quickly to try to prolong the economic expansion, it will be accused of caving in to a bully in the Oval Office.
For now, the central bank seems likely to keep rates on hold, to give it time for further assessment. The next meeting of the Fed’s policymaking committee will be held on June 18th and 19th. That’s about a week before Trump is due to meet Xi Jinping, the Chinese President, at a G-20 summit in Japan. The Fed, with its eye on trade tensions, seems unlikely to make any big changes before it sees whether that sitdown prompts Trump to abandon (or postpone, at least) his threat to expand greatly his existing tariffs on Chinese goods. Earlier this week, he said he’d reach a decision after the meeting.
With the 2020 election seventeen months away, Trump now has a key decision to make: How far is he willing to push his trade wars even as the economy and financial markets are starting to emit some distress signals?
This weekend, he stepped back from the brink in his confrontation with Mexico. Tweeting from Air Force One on Friday afternoon, Trump said there was “a good chance” that the two sides would reach a deal to avert the imposition of tariffs, but he added, “If we are unable to make the deal, Mexico will begin paying Tariffs at the 5% level on Monday!” On Friday night, Trump announced that an agreement had been signed, saying, “Tariffs scheduled to be implemented by the U.S. on Monday, against Mexico, are hereby indefinitely suspended.” In return, he said, Mexico had agreed to “take strong measures to stem the tide of Migration through Mexico, and to our Southern Border.”
The entire Mexico scare was a classic Trump ploy: creating a crisis and then claiming the credit for resolving it. American companies that import a lot of components and finished goods from Mexico will be relieved that the tariff threat has been lifted; so will Mexican exporters. The larger question of where the U.S. economy is heading in 2020 remains unresolved.