01:36 - Source: CNN Business
Why the market freaked out when Trump tweeted about trade
CNN  — 

President Donald Trump warned a few days ago that if he isn’t reelected the economy will crash, a scary prediction that drives home the supreme confidence he has in his own tough-talking madman theory of leadership.

Is it a prediction, a warning or a promise?

“I think people read these statements the wrong way. He isn’t making an analytical prediction about the stock market. He is making a threat: Vote for me or I will burn it to the ground,” tweeted the economist Austan Goolsbee, who chaired the Council of Economic Advisers under President Barack Obama.

It would certainly be a hard switch from Trump, with his tariffs and his ultimatums, to someone else. The confidence the President has in his own gut is not hurt by the fact that he has not yet gotten burned for setting fires he’d like to take credit for putting out.

But there are fires aplenty he’ll need to tend to, all of which could impact the economy, which is the centerpiece of his reelection campaign.

He has yet to deliver a major trade deal – talks with China have stalled and his long-promised update to NAFTA has not progressed in Congress. Talks with the European Union have gone slowly. But the effects of the tariffs he’s used to negotiate will only compound, especially if he resorts to new tariffs on Mexico or the EU. The economies of China and Europe are facing slowdowns that have not yet spread to the US.

He has not made headway with lawmakers over a government funding bill that will need to be passed by October. Around the same time, lawmakers will have to raise the US debt ceiling, which will be an uncomfortable reminder that the tax bill gave permanent tax cuts to corporations, fueling much deeper budget deficits.

There’s no doubt the economy was helped along along by Trump’s signing of the massive tax cut bill, but businesses, worried about his trade wars, have hoarded their cash.

Trump vs. the Fed

Trump is also sending some very mixed messages.

He wants everyone to know “we have one of the best Economies in the history of our Country.” But it could be a lot better if only the Federal Reserve would cut interest rates like he’s pressured the Board of Governors to do.

This is the dichotomy of Trump’s economy, which he simultaneously wants to be the best ever – but also in dire need of assistance.

Bucking all precedent, he’s pressured the Fed Board of Governors to cut rates to give him more leverage in a trade war, complaining that China props up its tech industry and Europe is moving to drive down the value of the euro.

Most Americans probably don’t know the name Mario Draghi, but Trump may have created a new bogeyman for his supporters when he complained about the outgoing European central banker on Twitter.

Trump wants the ability to weaponize interest rates the same way he’s used tariffs to cajole foreign governments. He brags that the annual rate of 3.2% growth in the gross domestic product that the US posted in the first quarter was good, but was hindered by the Fed. Chairman Jerome Powell, who Trump nominated in 2017, will hold a news conference around a Fed meeting in Washington on Wednesday and Trump has all but demanded a rate cut.

“He’s my pick. And I disagree with him entirely,” Trump told ABC’s George Stephanopoulos last week.

“Frankly, if we had a different person in the Federal Reserve that wouldn’t have raised interest rates so much, we would have been at least a point and a half higher,” referring to the GDP.

Powell has steadfastly refused to respond to Trump’s badgering.

“I don’t think it’s appropriate for me to comment on the President,” he told “60 Minutes” back in March.

And he does not see the Fed as part of the trade war.

“My duty is one that Congress has given us, which is to use our tools to achieve maximum employment and stable prices and to supervise and regulate banks so that they treat their customers fairly and so that they’re strong, well-capitalized and can perform their critical function in good times and bad,” said Powell. “That’s my job. And I think for me to get into responding to any elected official would be a distraction from that job.”

In dire need of a trade deal

But Trump feeds on the conflict, be it with China, Mexico, their central banks or the Fed.

He conceded, however, that he needs to deliver on trade after Stephanopoulos asked him if he has any concern about softening job creation numbers (The US added only 75,000 new jobs in May, fewer than analysts had predicted.)

“No, none – none – really none. If we pull off the trade deals, which I think I will, we have a lot of power.”

So skittish is the business community about the trade war Trump started with China that the stock market surged Tuesday after the President tweeted that he had spoken on the phone to the Chinese Prime Minister, reengaging on talks and opening the door for progress at an upcoming G20 meeting for the world’s largest economies.

The constant theme of Trump’s presidency is no one knows what he’ll do on any given subject, although he’s shown a tendency to zig when most people say zag.

The uncertainty about what he’ll do if the economy slows down may be contributing to some small cracks in American confidence in the economy.

Falling optimism

A Fox News poll out in June suggested that while a majority of registered voters are still optimistic about the economy, the percentage dropped from 63% in February to 57% in June, perhaps eating into Trump’s most important issue. Nearly half of voters in that poll said Trump’s policies helped people with more money; less than a third said his policies helped everyone.

He officially kicked off his reelection bid with a rally Tuesday night in Florida. As Trump sells his reelection to his followers, he’ll point to the strong “Trump economy” and he’ll happily take credit for the decade of economic expansion, which will set a record next month.

In a Quinnipiac University poll out Tuesday, a majority of Florida voters – 54% – say they are better off financially than they were in 2016. That’s with near record-low unemployment and after his win on the tax bill. Still, 51% of Florida voters say they disapprove of the way Trump is handling his job as President.

None of this means that Trump won’t be able to land a China trade deal or the Fed won’t lower interest rates. The US will enter record territory and 10 straight years of GDP growth next month.

The problem for Trump may be how he can continue to brag about the economy if his trade war or his immigration policy or a standoff over government spending starts to hurt it.