U.S. recession looks less likely in 2020, boosting Trump’s chances of re-election | TribLIVE.com
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U.S. recession looks less likely in 2020, boosting Trump’s chances of re-election

The Washington Post
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Things are looking good for the re-election of President Donald Trump, with fears of an imminent recession having been replaced with cautious optimism.

WASHINGTON — A noticeable shift has taken place on Wall Street and among many economists and business leaders in recent weeks: Fears of an imminent recession have faded and been replaced with cautious optimism, especially about 2020, a trend that bodes well for President Donald Trump as he seeks re-election.

The International Monetary Fund is a good example. It made headlines last week when it slashed its global growth forecast to the lowest pace since the financial crisis. But it is not as gloomy as it sounds. The IMF also predicted a rebound for later this year and slightly stronger growth next year for the world economy, which should be a positive for the United States.

“After the weak start, growth is projected to pick up in the second half of 2019,” wrote IMF chief economist Gita Gopinath in a blog post.

The IMF isn’t alone in its optimism. The U.S. stock market had one of its best starts to the year since 1998 and is now within striking distance of hitting an all-time high. Goldman Sachs says the likelihood a recession in the next year has been cut in half, to 10%.

There’s a plausible story to tell that explains why this optimism has taken root. It goes like this: A U.S.-China trade agreement looks likely, the Chinese economy appears to be stabilizing and the Federal Reserve (and other central banks) have shown they will do whatever it takes to keep this expansion going.

Many of the major fears that drove the stock market down at the end of last year and caused anxiety about a U.S. and global recession by 2020 have subsided. Instead of a recession, some are now talking about an “upside surprise” in which the U.S. economy could grow faster than expected, especially if businesses start to spend more as Trump’s trade war cools and the Fed doesn’t raise interest rates.

“The economy could grow more than 2% this year. I think that’s going to be the big surprise,” said Scott Minerd, global chief investment officer at Guggenheim Investments.

Almost no independent expert thinks the economy will achieve above 3% growth in 2019 and 2020 as the White House predicts. But most forecasters are now in the 2 to 2.5% range for 2019 and about 2% for 2020, which is likely good enough to keep unemployment low and wages rising at a robust pace.

How the economy fares in spring 2020 is likely to play a large role in Trump’s re-election chances, according to election experts like Larry Sabato of the Center for Politics at the University of Virginia. The best guess now is that the economy in early to mid-2020 won’t be the “huge” growth Trump likes to boast about, but there’s a decent chance it will be doing well enough to give him an edge against his Democratic opponent.

“If unemployment is still 3.5 to 4% and gas is still $2.75 and the stock market is still near a record high, then the economy is probably at the president’s back, or at least not a headwind,” said Mark Zandi, chief economist at Moody’s Analytics. “If you plug that scenario into our election model, Trump wins or it’s close.”

Predicting where the U.S. economy is headed is notoriously difficult, perhaps even more so now when it’s showing clear signs of slowing down from the robust pace of growth last summer. And it’s unclear whether the nation is experiencing a slight deceleration or something deeper.

On the upside, U.S. companies continue to hire at a robust pace and wages are rising, including for lower-skilled workers, which should make Americans comfortable enough to keep spending. The housing market is also showing signs of a rebound, another indication that people are still confident about the economy and their own personal finances.

China, a nation Trump often berates, also is providing a boost to the global and U.S. economies by stimulating its own. The world’s second-largest economy said Wednesday that growth was 6.4% in the first quarter, slightly better than expected and a sign that China has stabilized despite the trade war.

But not all is well. The U.S. manufacturing sector has had a noticeable slowdown this year, and business and consumer sentiment, while still high by historical levels, is down from where it was a few months ago. Europe also continues to look weak and has to sort out Britain’s exit from the EU in the fall. A “no deal” situation would be “the first time in about 45 years or so that we’ve had a large negative supply shock to an advanced economy,” said Bank of England Governor Mark Carney.

“We don’t know how to time recessions, but the list of things that could trigger one is getting longer, not shorter,” said Diane Swonk, chief economist at Grant Thornton. “A lot of land mines remain.”

Trump has repeatedly blamed the Fed, especially Chairman Jerome Powell, for dragging the economy down by raising interest rates too quickly last year (the Fed raised interest rates a full percentage point). But economists, investors and business leaders no longer see the Fed as a worry after Powell indicated that the central bank is “on hold” and unlikely to raise rates again this year.

With the Fed on hold, Trump is likely to play a large role in whether the economy and markets beat expectations or disappoint based on what happens with trade and the federal budget. On trade, he has dubbed himself a “tariff man,” sparking fears that his trade war won’t end. Many are now asking: After Trump finalizes a deal with China, will he turn his ire on Europe or Japan?

The Europeans “barely take our agricultural products and yet they can sell Mercedes-Benz and they can sell everything they want in our country,” Trump said Monday, signaling his ongoing desire to reduce the U.S. trade deficit with Germany. “It’s not fair.”

Trump has yet to remove any tariffs he has put in place. Even the steel and aluminum tariffs on Canada and Mexico, which he said were a bargaining tactic, did not change after the revised North American Free Trade Agreement (NAFTA) was finished last fall.

“All of the optimism about the economy assumes the U.S.-China trade conflict is rolled back, and Mr. Trump doesn’t start imposing auto tariffs on the EU and Asia,” said Joseph Brusuelas, chief economist at accounting firm RSM.

Trump’s best chance to spur the economy might be in striking a budget deal with House Speaker Nancy Pelosi, D-Calif., in September; Pelosi and Trump could easily keep funding levels the same as this fiscal year, or even go a little higher.

“The White House is going to have to come to the table with Speaker Pelosi,” said Brusuelas. “The only tool you can use to boost the economy before the election is government spending, especially if the Fed stays on hold.”

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