We don’t hear much from Donald Trump about the stock market these days. Odd, that. There was a time when he took credit for its spectacular rise after his election. “The reason our stock market is so successful is because of me. I’ve always been great with money.” Perhaps he has been absorbed with other matters. The Russia investigation, signing pink slips after cabinet meetings, designing a new putter. Or it just might be that he now believes “It’s the stock market, stupid” is not a winning campaign slogan. Or that he does not deem it sufficient to point out that after an 8 percent decline from its January 26 peak, the S&P 500 remains 22 percent above its level when the voters surprised him, not to mention Hillary Clinton and the media, with the news that he would have to give up the comforts of his Trump Tower penthouse in New York to rough it in the White House, with time off at Mar-a-Lago for good (or even bad) behavior.
Actually, if he had to go before the voters tomorrow, he could claim that the economy is in reasonably good shape, despite a Federal Reserve Board that is intent on raising interest rates, despite the threat of a trade war, despite a hole in the federal budget larger, relatively, than the ones that drove several of his enterprises into bankruptcy. They say that once past 70 men cannot change: debt has never frightened Trump when he was in business, it certainly is not frightening him now.
If he does decide that the focus on share prices is no longer in his interest, but that the economy is, he can point to several things:
- The economy is growing at about the 3 percent rate most consider quite satisfactory.
- Unemployment, at 4.1 percent, is low, and there are a record 6.2 million unfilled job openings even though Americans are returning to the labor force in droves—806,00 last month alone.
- Wages have moved from stagnation to modest growth, on the order of 2.0 percent to 2.6 percent, depending on the measure used.
- The value of all the assets (houses, shares) owned by households, minus what they owe, rose by $2 trillion last year, and household net worth, as it is called, was a tick below a record $100 trillion at year end.
- House prices are now above their pre-crisis peak.
Looking ahead, the results of the tax cut—a bit more consumer spending, more business investment in the near- and medium-terms, some repatriation of the $2.2 trillion in corporate funds stashed overseas—are likely to be felt this year and next. Little wonder that the CEO’s of America’s largest companies say they expect sales and their investments over the next three months to be at the highest level in the past 15 years. That should carry the economy through to the November elections, which augurs well for those Republicans who can succeed in a delicate task: distancing themselves from an unpopular president, without at the same time alienating the Trump core.
For Trump, the problem is less November 2018 than November 2020, when he stands for re-election. Should the economy soften before then, policy makers will face an impending recession with few weapons at their disposal. If the economy slows (and it will) the authorities ordinarily unsheathe two weapons. The federal government borrows and spends‚ loosens fiscal policy in the jargon of the trade. And the Fed cuts interest rates and buys bonds to drive their prices up and therefore interest rates down. Neither policy is likely to be available.
The tax cuts and the profligate budget just agreed to by both parties have already massively increased the deficits the federal government is likely to incur over the next decade. Two developments allowed this to happen. The first is Trump’s takeover of the Republican party and its abandonment of any willingness, at least at times, to fight for its core beliefs—balanced budgets, minimal spending, sound money, small government. The second is the agreement of both parties that bipartisan deadlock can be broken only when they agree to each other’s demands—Republicans for more money for the military, Democrats more cash for social programs.
In a recession, the government would be able safely to increase spending and deficits, as Keynes would recommend, only if it had taken his advice and run surpluses in good times. Which it hasn’t. Nor will the Fed be of much help: Even after a few quarter-point rate rises it will be operating from a base of interest rates so low that there would be little room to lower them further.
In short, American policy makers go naked into their battle with the next recession.
The blame game from the president’s critics will begin: His careering from issue to issue is creating so much market volatility that risk overrides the strong economic fundamentals. The downturn was caused by trade wars and the threat of trade wars. The inability of the heavily-indebted American government to mount a stimulus is due to the improvident tax cuts of 2018. The dumping of U.S. Treasury bonds by foreigners is by way of payback for the infidelity of its American ally during the Trump years. The reduced purchasing power of take-home packets shows Trump might have “been great with money,” but with his, not ours. It will do Trump no good to tweet until his thumbs are calloused. He got to the White because enough Americans thought they needed a businessman-president, the first since Herbert Hoover. A recession would persuade them to look for a person with a different calling.
Of course, there might not be a recession by 2020. In which case the Trump campaign theme will be “It’s the economy stupid.” Borrowed from the Clintons.