By Ben White* – Politico
The president’s big economic achievements were wrapped up in 2019. Now Trump needs momentum in the economy and markets to stretch out for more than 10 months through Election Day.
Most of the economic gifts President Donald Trump is going to get for 2020 are already unwrapped and out from under the tree.
The Federal Reserve slashed rates and went dark. The “phase one” China deal is pretty much done. So is the new NAFTA.
That leaves one big question for a recently impeached president as he heads for a dicey reelection bid: What’s left to goose markets and the economy beyond what most expect will be a pretty blah 2020?
Even blah — a 2 percent-or-so growth rate with unemployment still near or below 4 percent — could be enough to help Trump overcome a low approval rating and win again.
But if he really hopes to romp over the eventual Democratic nominee, he’ll probably need markets to keep popping and growth to bubble higher, especially in the industrial Midwest. And it is far from obvious how the United States can get there from here.
“I don’t think we are going to see growth reaccelerate in 2020,” said Mark Zandi, chief economist at Moody’s Analytics. “The trade truce takes the recession risk off the table for now, but it’s not enough to propel stronger growth. If it’s a 2 percent economy, then all else being equal — and it’s a typical turnout — Trump will probably win. But if there’s strong Democratic turnout, especially in manufacturing states with weaker economies, those states will probably flip.”
The White House and the rest of the GOP, of course, take a very different view.
They see the China deal and U.S.-Mexico-Canada Agreement as rocket boosters and predict a breakout in previously stalled capital spending and manufacturing, driving Trump to a “Morning in America” Electoral College blowout that keeps former Blue Wall Midwestern states firmly in his column. They also talk up what will certainly be a Tax Cuts 2.0 plan Trump will roll out some time next year as a tantalizing treat with no chance of becoming law in 2020.
“As long as there is no recession, I think Trump is in good shape — and if growth is stronger he’s in really good shape,” said Stephen Moore, a conservative economist and outside adviser to the president. “I think we will grow at 2.5 to 3 percent. And the last two weeks have been really good for Trump with USMCA and the China deal. And they couldn’t have come at a better time for him.”
As the year draws to a close, here are three big things that could make or break the economy and the stock market as big advantages for Trump heading into his 2020 reelection bid.
Will manufacturing rebound?
Perhaps the biggest risk to Trump — and the toughest knock on his record — is the monthslong decline in manufacturing that began as Trump’s trade wars really took hold. Manufacturing tipped into recession territory over the summer and has yet to turn around, leading to weaker economies in states that Trump needs to win in 2020. That includes places like Pennsylvania, where the unemployment rate is rising and hit 4.2 percent in October.
Michigan also has an unemployment rate above the national average at 4.1 percent and saw declines in the manufacturing sector in both September and October, though some of that came from the now-ended strike at General Motors.
The question for Trump is whether at least stopping new tariffs on Chinese imports — which are often inputs into the manufacturing process — can reverse the slide in manufacturing, a sector that represents a small slice of the overall U.S. economy but was critical to the president’s “Make America Great Again” message. Economists are skeptical that a China deal leaving most of the existing tariffs in place will have a large impact.
“I’m not sure you are going to see a very sustained change unless uncertainty around trade dissipates completely,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “One positive is the threat of new tariffs at least is not there, though honestly I’m not sure it’s really gone away.”
Farooqi noted that some readings on capital spending are looking positive, including in the Empire State and Philadelphia Fed surveys. But it’s unclear that a broad uptick in capital spending the White House is hoping for will materialize.
Manufacturing in 2020 could also take a significant hit from Boeing’s decision to halt production of its 737 Max airliner after serious safety concerns. Boeing is a giant part of U.S. manufacturing and the hit will be felt not just in the loss of production of planes but also well down the supply chain.
The halt to Boeing 737 Max production next month will likely shave half a percentage point off first-quarter economic growth, RSM economist Joe Brusuelas said in a note to clients. “The economic damage will likely be noted via the inventory channel, factory orders, industrial production and likely headcount among aircraft suppliers.”
Trump grew so concerned about the Boeing impact he placed a direct call to the company’s now-former CEO, Dennis Muilenburg.
Can the stock market keep popping higher?
Trump loves to brag about new records in the stock market, tweeting about them relentlessly since taking office in 2017. And he’s correct that there have been big gains, with the Dow Jones Industrial Average up more than 50 percent since his election in November 2016 (his preferred time frame for calculating the increase).
Market professionals say Trump’s corporate tax cuts and deregulatory agenda in energy, financial services and other industries get much of the credit for the gains. But the Fed played a role as well.
Stocks took a big plunge in the second half of 2018 as the trade wars raged and the Fed quickly stepped in early this year — after heavy brow-beating from Trump — with a series of rate cuts that helped push markets higher even as overall growth slowed and the impact of Trump’s tax cuts faded.
But earlier this month, Fed Chairman Jerome Powell signaled the central bank is out of the rate-cutting business for now, removing one catalyst for future market gains. And a very strong November jobs report only reinforced the Fed’s view that the economy should be fine without added stimulus.
This did not sit particularly well with Trump, though he has generally reduced the frequency of his attacks on Powell.
“Would be sooo great if the Fed would further lower interest rates and quantitative ease,” Trump tweeted Dec. 17. “The Dollar is very strong against other currencies and there is almost no inflation. This is the time to do it. Exports would zoom!”
That’s not likely to happen. And traders worry that expected slow growth and current high market valuations mean 2020 might not be a boom year for Wall Street.
“The thing about gains this year was they largely came from an increase in multiples and not earnings growth,” said Steve Massocca of Wedbush Securities, referring to a phenomena in which the price of a stock goes up without the underlying company actually earning much more money. “And a lot of it was driven by monetary policy not just from the U.S., but from the Bank of Japan and the European Central Bank. This is an expensive market and the tea leaves don’t show significant further gains.”
Will the election itself cause a slowdown?
One concern bubbling around economic and Wall Street circles these days is that while impeachment doesn’t seem like a big deal — everyone thinks Trump will get acquitted in the Senate — the 2020 election could produce a significant drag on markets and economic growth.
Polls suggest a close race no matter who emerges with the Democratic nomination. And even if the nominee is a more business-friendly moderate like former Vice President Joe Biden, a switch in power in the executive branch could bring dramatically different tax and regulatory policies. Some of this will depend on the outcome at the congressional level, because even a President Elizabeth Warren would not be able to reverse Trump’s tax cuts with the GOP holding at least one house of Congress. But a radical change in course in the White House is a widely held concern.
“What is health care going to look like? Are you going to be able to have corporate profits? Are we going to have certain taxes on corporate profits? What are they going to do with corporate buybacks? What are they going to do with corporate legislation? It’s a really tough environment,” Gary Cohn, Trump’s former National Economic Council director, said at a recent event hosted by the Securities and Exchange Commission.
Trump’s allies are worried about this as well, wondering whether a race that is expected to be more expensive and nastier than perhaps any in American history could create a drag on corporate spending and stock prices that in turn dents the president’s consistently solid ratings on the economy.
“I’m a little surprised the market is doing so well now given what I call the ‘Elizabeth Warren risk,’” Moore said. “Let’s say you get to a 50-50 race, then you start pricing in the likelihood of Warren or really whoever it might be winning, and then the market reacts to that and that drags everything down.”
*Ben White is POLITICO Pro’s chief economic correspondent and author of the “Morning Money” column covering the nexus of finance and public policy.