Editor’s Note: Editor’s note: This story was originally published June 1, 2019. It has been updated to reflect the unexpectedly strong June jobs report.
The economy has been like President Donald Trump’s safety blanket.
Regardless of his trade wars with top US trading partners, the Mueller investigation or his threats to Iran and North Korea, the markets have performed for him. The unemployment rate has remained impressively low and the country’s economic expansion has kept chugging toward a new record.
The US employment market made a surprisingly strong comeback in June after a weak May report, adding 224,000 jobs – far more than analysts had predicted. If the gross domestic product keeps expanding through July, that will be more than 10 years – 120 months – of constant growth.
That steadiness was on full display this week, after Trump overruled his top economic advisers and threatened to impose tariffs on every single good coming in from Mexico. The stock market basically said meh.
The economy will be the card Trump plays in 2020, perhaps more than any other.
“When you have the best employment numbers in history, when you have the best unemployment numbers in history, when you have the best economy probably that we’ve ever had, I don’t know - how the hell do you lose this election, right?” the President said at a rally earlier this month in Pennsylvania.
But will it pay off for him the way he’s hoping?
A case of the jitters
Economists who study this stuff have had jitters about whether the expansion is sustainable. They’ll point to an inverted Treasury yield that’s making bond markets freak out, a tepid housing market in cities, the recent stock market wobbles and the trade war with China.
What’s kept some investors and companies going through the standoff with China is the hope that it would soon end. But after the collapse of the most recent round of talks in Washington, both Trump and his counterpart Xi Jinping have made clear that they aren’t expecting any immediate progress. China went ahead Friday with retaliatory tariffs, and could take the fight to a new level if it acts on a threat to restricts US access to rare earth metals needed for cell phones and other sensitive electronics.
On the stock market, as Yahoo Finance pointed out, most of the market’s remarkable bull run under Trump came during his first year in office. The market topped out at more than 26,600 in January 2018 and has stayed around there, give or take, ever since. That, coincidentally, was when the President announced the first of his nationalist tariffs.
Trump’s trade war with China has led to a shrinking trade deficit with that country, but the overall US trade deficit has continued to grow, suggesting that the President’s goal to bring production of goods back to the US has not been achieved.
If those are red lights flashing, consumers are not seeing them; their confidence is close to an 18-year high.
And a lot of smart people – even those who disagree with Trump’s policies – are not immediately concerned about a recession, which is generally defined as two consecutive quarters of negative economic growth. Given the impending record of 120 months of expansion, a recession seems a long way off.
Expansion could go continue for years. Or not.
Back in April, JPMorgan CEO Jamie Dimon said the expansion could continue for quite some time.
“It could go on for years,” he said in a conference call reported by CNBC. “There’s no law that says it has to stop. We do make lists, and look at all the other things: geopolitical issues, lower liquidity. There may be a confluence of events that somehow causes a recession, but it may not be in 2019, 2020, 2021.”
That, notably, was before Trump’s trade talks with China cooled. More recently, Dimon said trade could be a factor in derailing growth.
“Trade has gone from being a skirmish to being far more important than that,” he said, as reported by CNBC. “If this goes south in a bad way, and you have other surprises, that could be part of the thing that changes confidence, changes people’s willingness to invest.”
Compounding issues were on display Wednesday, as rising concern about China dovetailed with special counsel Robert Mueller’s public comments that his investigation into Russian election attacks was hamstrung by Department of Justice rules from resulting in charges against Trump even though it could not clear him.
It may no longer be the economy, stupid
The issue for Trump is that his 2020 prospects are so reliant on the economy while his approval ratings have not kept pace with how well he says things are going.
“Even amid record-low unemployment, robust economic growth and a roaring stock market, President Donald Trump has shown no signs of expanding his support beyond the roughly 46% of the vote that he carried in 2016,” CNN analyst Ronald Brownstein wrote this week as he documented how the coming election will test the maxim that the economy is key to US politics.
Democrats have made clear they want the election to be about issues and not about Trump.
Political opponents of Trump like Jared Bernstein, who was chief economist to then-Vice President Joe Biden during the Obama administration, do not necessarily see a recession on the horizon.
“First of all, I want to be clear, it is a fool’s game to try to predict the next recession,” said Bernstein in a phone interview before Trump’s threat of new tariffs on Mexico. “That said, the American consumer remains pretty strong and they’re at the heart of at least near-term economic outcomes. Consumer spending is nearly 70% of our economy.”
The political answer to a booming economy is inequality
Bernstein said Democrats in 2020 will have to focus on the idea that the economic boom under Trump was born of tax cuts that created a sugar high.
“I think the Trump tax cuts were a massive misdirection of critical resources, but those cuts combined with other deficit spending has to create a fiscal boost to the economy,” he said, adding they “juiced economic growth.”
But while the tax cuts did undoubtedly help the economy in the short term, he said the key for Democrats is to show that the reductions haven’t ultimately improved the lives of everyone or even most people. There’s no evidence yet that the cuts, which most benefited the wealthy and corporations, will lead to longer-term business investments, growth or wage gains. What they’ve definitely done is explode the US budget deficit.
“Once, again, this trickle-down stuff has been shown to be snake oil,” he said.
Addressing inequality is central to Democratic proposals like “Medicare for All” from Bernie Sanders, free college tuition and child care from Elizabeth Warren, universal income from Andrew Yang and baby bonds from Cory Booker. Warren and Sanders want to impose taxes on the wealthy to help pay for these programs.
Bernstein pointed to figures, published for the first time by the Federal Reserve in March, that show the top 1% of Americans have 30.9% of the country’s net worth. Compare that with the bottom 50%, who have 1.2%.
The data shows that the total net worth of US households has more than quadrupled since 1989, but the increase has mostly benefited the top 10% of households, while growth has been much slower for lower groups and nearly nonexistent for 50% of the country.
In 2018, according to the Fed, the top 10% of US households controlled 70% of all household wealth, and their growth came at the expense of households with lower incomes, whose share of total net worth decreased. The bottom half of households saw their share of the country’s wealth shrink from 4% in 1989 to 1% in 2018.
Who feels helped by Trump?
There is also a key regional aspect to the country’s economic dissonance, as Bernstein documented with a recent Washington Post piece about his own battle to survive a severe brain hemorrhage earlier this year.
He survived, he wrote, in part because he lived in a city near a good hospital and had quality health insurance – things not all Americans have.
“Anyone who wants to be president needs to explain how he or she is going to address the stark regional inequalities,” he said. “Whether it’s jobs, opportunities, business start-ups, health care, hospitals, addiction. I want to hear concrete plans about how we’re going to address this increasing regional divide.”
And Trump’s success in 2016 came in large part because of frustration among less educated white voters in Rust Belt states angry that the economy and the country were leaving them behind.
Whether those voters – be they farmers, coal miners or autoworkers, will be buoyed by the President standing up to China or angry that Beijing’s countermeasures often target them directly could be a key element of whether Trump is reelected, regardless of the stock market and the data economists pore over.