Despite gyrations on Wall Street this week and an associated rise in recession fears, Donald Trump is still ballyhooing the state of the U.S. economy. In private, however, the President sounded “nervous and apprehensive” when he called a number of business leaders and financiers from his New Jersey golf club to get their opinions, the Washington Post reported.
Small wonder. With his personal-approval ratings stuck in the low forties, Trump’s 2020 reëlection campaign hinges on a healthy economy. He can be pretty confident that his core supporters will turn out for him, but he also needs to win over some less committed voters. His pitch to them is one that the British Conservative Party used successfully in 2015, during a general election, when it talked up the U.K. economy and issued dire warnings about the consequences of a victory for the opposition Labour Party.
One of the Conservatives’ campaign slogans was “DON’T LET LABOUR WRECK IT.” Substitute “THE DEMOCRATS” for “LABOUR” and you have Trump’s campaign strategy in a nutshell. Addressing a campaign rally in New Hampshire on Thursday night, he portrayed the Democratic candidates for President as “a bunch of socialists or communists” and asked the crowd, “Does anybody want to pay a ninety-five-per-cent tax?” He also suggested that a Democratic victory would lead to a crash in the stock market, adding, “You have no choice but to vote for me, because your 401(k), everything is going to be down the tubes. Whether you love me or hate me, you have got to vote for me.”
The mere fact that Trump’s strategy is based on scaremongering (under Barack Obama, the Dow more than doubled) and outright lies (Joe Biden is a socialist?) doesn’t mean that it can’t work. In 2015, the British economy wasn’t doing great at all. Held back by five years of Conservative austerity policies, it hadn’t even fully recovered from the Great Recession. But the Conservatives, aided by their allies in the British media, managed to raise enough doubts about Labour’s economic competence to gain an over-all majority in the House of Commons. As long as the U.S. economy looks strong, the possibility of something similar happening in November, 2020, can’t be ruled out entirely, despite Trump’s unpopularity.
But, if the economy turns south between now and the election, Trump will almost certainly be defeated, and he knows it. Hence his delay, earlier this week, on expanding tariffs on Chinese imports, and his increasingly frantic efforts to scapegoat the Federal Reserve and its chairman, Jerome Powell. As the Dow plunged on Wednesday, Trump took to Twitter, calling Powell “clueless” and retweeting guests on Fox Business who were criticizing the Fed’s recent policy moves.
In the two days since the big fall in the stock market, we’ve received some new economic data, and it has been mixed. On Thursday, the Commerce Department reported that retail sales expanded by 0.7 per cent in July, the strongest figure since March. Economists responded by raising their estimates of third-quarter G.D.P. growth to about two per cent. That’s a long way short of the four-per-cent growth that Trump promised, but it’s also well above recession levels.
At the same time, the Fed confirmed that the manufacturing sector is in a slump. Manufacturing output fell 0.4 per cent in July, the central bank said, and it is now about 1.5 per cent below its December, 2018, level. For a President who promised to restore manufacturing to its former position of prominence, that can hardly be reassuring. Neither can the news, on Friday, that the University of Michigan’s survey-based index of consumer confidence fell sharply in August, reaching its lowest level since 2016.
The fall raised concerns about whether strong consumer spending will continue to underpin the economy, and it also illustrated that Trump’s aggressive tactics in the trade war are backfiring. “Consumers strongly reacted to the proposed September increase in tariffs on Chinese imports, spontaneously cited by 33% of all consumers in early August,” Richard Curtin, the chief economist at the Michigan survey, noted. The White House has now postponed the higher tariffs until December. That may reassure some consumers, but this week’s fluctuations in the stock market are likely to add to their jitters.
To be sure, none of this means that a recession is imminent. Most economists are predicting that the G.D.P. will continue to rise, albeit at a modest pace. Citing continued growth in jobs and household incomes, Curtain said “it is likely that consumers will reduce their pace of spending while keeping the economy out of recession at least through mid 2020.” The most recent statements from the Fed indicate that it agrees with this assessment.
Despite all his bluster, Trump seems spooked. According to the Washington Post report, he has been “telling some confidants that he distrusts statistics he sees reported in the news media and that he suspects many economists and other forecasters are presenting biased data to thwart his reelection.” These sound like the ravings of an egomaniac who sees the world closing in on him.
The hardened battle lines were prompted by Beijing’s decision to take a more aggressive stance in negotiations, according to the people following the talks. They said Beijing was emboldened by the perception that the U.S. was ready to compromise.
- In particular, these people said, Mr. Trump’s hectoring of Federal Reserve Chairman Jerome Powell to cut interest rates was seen in Beijing as evidence that the president thought the U.S. economy was more fragile than he claimed.
- Beijing was further encouraged by Mr. Trump’s frequent claim of friendship with Chinese President Xi Jinping and by Mr. Trump’s praise for Chinese Vice Premier Liu He for pledging to buy more U.S. soybeans.
An April 30 tweet, in which Mr. Trump coupled criticism of Mr. Powell with praise of Chinese economic policy, especially caught the eye of senior officials. “China is adding great stimulus to its economy while at the same time keeping interest rates low,” Mr. Trump tweeted. “Our Federal Reserve has incessantly lifted interest rates.”
“Why would you be constantly asking the Fed to lower rates if your economy is not turning weak,” said Mei Xinyu, an analyst at a think tank affiliated with China’s Commerce Ministry. If the U.S.’s resolve was weakening, the thinking in Beijing went, the U.S. would be more willing to cut a deal, even if Beijing hardened its positions.
That assessment, however, flies in the face of a strong U.S. economy. Gross domestic product in the first quarter rebounded from the end of 2018, with growth clocking in at a seasonally adjusted annualized rate of 3.2%, up from 2.2% the prior quarter. The jobs report for April, released on Friday, showed the unemployment rate falling to 3.6%, the lowest in nearly 50 years.
But at the same time, China’s economy has stabilized this year following months of weakness. Although China’s exports dropped unexpectedly in April, its first-quarter growth came in at 6.4%, beating market expectations. The generally improving economic picture gave Beijing more confidence in trade talks, as did a recent conference on the country’s vast infrastructure-spending program, called the Belt and Road Initiative, which was attended by about 40 heads of government and state.
Chinese leaders saw the conference turnout “as China has more leverage to improve relations with other countries and with the U.S. business community,” said Brookings Institution China specialist Cheng Li. “It made them play hardball.”
If China misread the signals—and vice versa—it wouldn’t be the first time.
The history of U.S.-China trade negotiations is filled with misunderstandings, as the two nations, with very different political systems, struggle to figure out each other’s intentions.
.. In another apparent sign of mixed signals, Trump administration officials had thought they had made it clear that they were weary of negotiations and that it was time for Beijing to make specific commitments to change laws, including adding protections for intellectual property and barring the forced transfer of U.S. technology.
As talks resume Thursday, one big question mark is whether China will agree to U.S. demands for changes in Chinese law to implement the trade deal. Beijing maintains this would impinge on Chinese sovereignty and take too long to implement, but Beijing had made similar commitments in prior trade deals, including those it signed to join the WTO in 2001.
U.S. officials say Beijing has failed to make good on those commitments, while China has promised to further liberalize its economy.
“The U.S. is correct to seek a multiprong approach of not relying solely on commitments but also actually changes to the laws, so as to ensure Chinese leadership intentions are fully conveyed down to all local levels of government,” said Harvard Law Professor Mark Wu.
President Trump is blaming the Federal Reserve for holding back the economy and stock market, despite the Fed’s decision to do two things he wanted: halt rate increases and stop shrinking its asset portfolio. According to a person who directly heard Mr. Trump’s comments at a meeting, the president recalled a recent phone conversation with Fed Chairman Jerome Powell. “I guess I’m stuck with you,” the president recalled telling Mr. Powell. Mr. Trump has blasted the Fed and Mr. Powell at three meetings in the past week alone.
From reporter Nick Timiraos:
Fed officials have been puzzled by surprisingly muted inflation pressures in recent months, which—together with worries about growth in Europe and China, and increased market volatility late last year—justified their interest-rate pause in the first quarter. One challenge for Mr. Powell that his recent predecessors didn’t face: President Trump’s acerbic criticism—by pre-emptively blaming the central bank for any wobbliness in the economy—could magnify any misstep. Even though Fed officials promise they are tuning out politics, every comment by Mr. Trump will inevitably filter the Fed’s policy decisions through a political lens in the eyes of at least some market participants.
President Trump has unabashedly hitched his political fortunes to a rising stock market. Now, with stock prices in retreat, he has become increasingly fixated on the idea that one man is to blame for the recent rout: Jerome H. Powell, chairman of the Federal Reserve.
After the Fed raised its benchmark interest rate on Wednesday, the fifth consecutive quarterly increase, Mr. Trump fretted to aides that Mr. Powell would “turn me into Hoover,” a reference to the man who was president in the early years of the Great Depression.
Mr. Trump has said choosing Mr. Powell for the Fed job last year was the worst mistake of his presidency, and he has asked aides whether he has the power to fire him.
But the volatile stock market, which just posted its worst week since 2008, is falling in part because of Mr. Trump’s own policies, including
- an escalating trade war with China,
- a shutdown of the federal government and
- the fading effects of the $1.5 trillion tax cut Mr. Trump ushered in at the end of 2017.
While the Fed’s rate increases have upset investors — who seem to have a darker view of economic growth than the central bank does — some analysts said Mr. Trump’s musings about the Fed would only exacerbate anxieties.
“If Powell gets terminated, what we’ve seen happen in the markets in the past few weeks will look like a walk in the park,” David Rosenberg, chief economist at Gluskin Sheff, said in an email on Sunday. “The dollar will go into a tailspin, and even confidence in the Treasury market will erode, especially among foreign creditors.”
Mr. Trump’s economic advisers scrambled over the weekend to reassure markets that Mr. Trump was not, in fact, planning to fire Mr. Powell. Treasury Secretary Steven Mnuchin tweeted what he said was a quote from Mr. Trump accepting that he did not even have the power to do so.
Mick Mulvaney, the incoming acting White House chief of staff, implied on Sunday that Mr. Trump had, in fact, inquired about removing Mr. Powell, saying on ABC’s “This Week” that the president “now realizes he does not have the authority.” But Mr. Mulvaney added that he had heard this from Mr. Mnuchin, not from Mr. Trump.
.. Mr. Mnuchin has worked in recent days to obtain Mr. Trump’s assurance that he would not remove Mr. Powell, according to an administration official who spoke on condition of anonymity. But that person cautioned that Mr. Trump could change his mind. The person noted Mr. Trump has a tendency to nurse grudges even when he temporarily sets a subject aside.
.. Some economists argue the Fed should continue its stimulus campaign to drive up employment and wages. They note that the Fed is about to undershoot its 2 percent inflation target for the seventh consecutive year, suggesting there is no need to step on the brakes.
.. In fact, during his presidential campaign, Mr. Trump accused the Fed of getting political, saying that the bank’s chairwoman at the time, Janet L. Yellen, should be “ashamed” for keeping interest rates low — a move he said was meant to help President Barack Obama.But it is far from clear such a decision would serve the president’s purpose. A replacement for Mr. Powell would require Senate confirmation, and this person would join a policymaking committee that voted unanimously for the December rate increase. That committee also might be inclined, on future rate decisions, to demonstrate its independence from the president.
.. Mr. Trump also chose three of the other four members of the Fed’s board, all of whom joined Mr. Powell in voting for all four 2018 rate increases.In conversations with friends and advisers, Mr. Trump has acknowledged responsibility for the selection of Mr. Powell. He told Stephen Moore, an economist at the Heritage Foundation, that it was “one of the worst choices I’ve ever made,” according to Mr. Moore.Some of Mr. Trump’s economic advisers have encouraged him to remove Mr. Powell, arguing that the decision would reverse recent stock declines.
Sarah Binder, a professor of political science at George Washington University, said presidents had often tried to shape Fed policy, but the current episode stood apart because Mr. Trump appeared to be acting against his own interest in a stable economy.
“I think what is the unusual part here is that it seems the president has created the crisis,” she said. “His intervention certainly seems to be making things worse for him and worse for the Fed and worse for the economy. It’s just very shortsighted, and we’re not used to that.”