Terry H. Schwadron
Aug. 23, 2019
Here’s the thing I don’t like about our societal habit of looking at stock market performance as a useful reflection of whether we are economicly healthy: The markets are set up as a risk, but its practitioners only want sure bets, not risk at all.
So, when things start to look dicey — as they have in the last week or so over fears of a U.S. slowdown or more accurately, a global slowdown — even the possibility of a technical recession, all eyes turned to the White House to see what the big guy was going to come up with the assure uncertain feelings.
What he said was remarkable: There is no problem. We’re fine. And while he denying that any slowdown might be near, Donald Trump did cave a bit on extending tariffs to a vast assortment of Chinese exports, delaying them until after Christmas buying season. And then, when he took a breath from blaming others for not making a good economy an excellent economy, he floated, then denied, then owned the idea of another tax cut, this time on payroll taxes that fuel Social Security.
So, Trump apparently thinks that expected business growth tops securing debt or maintaining Social Security. Hmm.
For sure, these are moves that we should see as a tip of the hat to business buddies on Wall Street as a possible postponing what more and more business leaders are suggesting indeed is a looming threat of showdown — or technically if stretched over two quarters, a recession. And we should see them as Good for Trump, to stretch any policy to look good in a re-election run.
On some level, postponing more tariffs was a decision that was good for all, and an acknowledgement that the White House is on the wrong path, and a payroll tax would actually help middle-class residents more than the previous cuts. On other level, however, these moves are troublesome. They reflect too close an association between keeping to well-off from uncertainty about making yet more money on the one side and weaponizing the economy to extend the political fate of Donald Trump. They also are signs of policy being made almost off the cuff without thinking through the implications on the country at large.
After all, here is the president and all the president’s men saying things are just fine economically, and yet they are weighing stimulus moves. Huh?
As a nation, we’re confused among a healthy job-producing economy (though news this week suggested not as job-producing as the White House would have us believe), business investments and profits, stock market happiness and international financial dominance. When Trump says things are good, he overlooks an increasing income gap between rich owners, corporations and workers; when he sees low-employment rates, he does not see pay issues. When he sees good market numbers, he sees a general sense of well-being.
Of course, this continuing mutual concern between the White House and Wall Street is all about politics as well as economics. It is about the image of a strong economy rather than an actual strong economy for anyone other than the investor class. For any president, the idea of economic slowdown and possible U.S. and global recession is a terrible turn of events, particularly during an election cycle. But for this president, such a development would be particularly destructive because a well-producing economy seems to be the singular draw for his re-election.
The number of people, particularly business leaders, who say that they detest Trump for his racism, his insults, his squashing of human and institutional protocols but support Trump’s ability to keep their pocket filled seems huge among the well-to-do.
Now Wall Street is getting gloomy about sustaining the economy as it would have it, with recession warnings mounting and market volatility rising. Economists at Goldman Sachs, Morgan Stanley and Bank of America are saying that the trade war with China, a rising national debt, the failure to rein in spending and the beginnings of a jobs slowdown all point to negative conclusions.
Last week the markets dropped multiple times, dangerously one day, though still well above their levels three years ago. Moreover, the Fed has lowered its main borrowing rates for banks, the tax cuts were passed last year, the government has seriously dropped hundreds or thousands of regulations that may have slowed business development.
Given a few more days and more reactions by central banks and governments worldwide, there are ameliorating adjustments in the markets. China said basically it would like to meet the United States “halfway” in U.S. objections to its long-standing economic patterns of manipulating currency, of forcing U.S. investors in China to share their technology with their hosts, basically cheating on international rules. Market unhappiness eased. Breathless headlines abated. The obvious solution: Wait a minute before leaping to a conclusion.
Plus, amid the market plunges, there were positive business reports from Walmart and other retailers, confusing the darkening picture.
Still, two things are true for Trump the economic leader. One is that he, like other presidents, actually do not have a lot of control over market directions. The second is that the tools available other than direct investments are limited. There is an argument that the government has mostly exhausted the tools at hand toward stimulation without doing things like infrastructure projects that actually feed government-paid jobs and investments.
What’s worse, as The Washington Post’s Catherine Rampellpoints out, “If things go south, this administration doesn’t have a plan. It never had a plan. And it doesn’t have competent personnel in place to come up with a plan. Trump’s economic brain trust consists of a guy who plays an economist on TV, a crank who has been disowned by the (real) economics profession and the producer of The Lego Batman Movie” in Larry Kudlow, Peter Navarro and Steve Mnuchin.
What Trump has done is worsen everything with stubbornness in these trade wars, and as the news worsens he will blame more people, just as he has targeted Jerome Powell, head of the Federal Reserve, for not dropping artificial borrowing rates quickly enough. But there is no evidence that anyone who wants invest can’t get cash. It is uncertainty, not cash that is the problem.
“The collective wisdom now spreading across Wall Street is that no trade deal will be struck with China before the 2020 election; business investment will continue to sag; and a series of interest-rate cuts from the Federal Reserve won’t be enough to juice more growth out of an economy now in its tenth year of expansion — the longest stretch in American history,” said Politicoin an assessment last week.
Consider that besides the tariffs, there are uncertainties about embargoes against several countries, the looming Brexit disaster and business downturns in any country dependent on foreign trade.
Economists are watching several indices that include jobs, productivity, foreign markets, currencies and the like. There was a bit of panic when the “yield index curve” in the bond market turned negative — meaning that investors were abandoning longer-term bond investments for short-term investments, a sign of lack of confidence.
Jobs are beginning to slow, productivity is being juiced by the introduction or growth of automation, also at the cost of jobs, foreign markets are tanking faster than in the United States, and the U.S. currency is considered overly strong, which actually puts America in a less-competitive position for overseas markets.
The buzzword, as always, is business investment, not whether you and I can pay the rent, tuition, health and clothing bills that pour in.
Overall economic growth has cooled to a 2.1 percent pace in the second quarter after nearly hitting Trump’s goal of 3 percent last year following a round of tax cuts and higher federal spending. That will be worsened by the trade wars with China.
White House bravado aside, interest rates adjusted for inflation remain very low by historic standards, and few businesses report having any trouble getting credit. But businesses report that investors are now asking higher interest rates on short-term debt, a trend that tends to precede recessions.
After China allowed its currency to weaken and the United States called China a “currency manipulator,” central banks around the world including in India, New Zealand and Thailand also moved to cut rates and potentially weaken their currencies, raising fear of a global currency war with wildly unpredictable impacts.
As Politico explained, the U.S. has long been a leader in the global consensus that currencies should generally reflect underlying economic conditions. If the administration moves to devalue the dollar, it could lose that role and other countries could retaliate — possibly slamming American exporters even as U.S. consumers have less buying power.
So far, strong consumer spending and continued solid employment numbers have kept a floor under the economy, ensuring that slowing growth does not lead to recession.
The economic news just over the horizon will be important, no doubt. But the politics associated with those developments may prove just as interesting.