Terry H. Schwadron
Dec. 27, 2018
Questions increasingly are being asked aloud about the state of the economy, especially with a jumpy stock market that has decided to sell off amid dropping prices, only to reverse four weeks of drop in a single day.
Indeed, average stock prices across all the major measures had fallen by record percentages amid growing uncertainty about the government shutdown, trade tariff policies, the continuous criticism of the Fed’s monetary policies by the White House and general jitteriness about America’s jerkiness about foreign policy and personnel shifts in the Cabinet. Then magically, or because of lowered prices, the market mavens regained the losses in a day, seemingly on news of high holiday sales and assurances that the White House was not moving against the Fed chairman, despite lots of presidential tweets pointing that way.
Still, from what I read, including solid analysis in The Washington Post, these are the things to keep in mind:
· The overall economy remains strong, even if the markets are volatile. The economy reflects today’s jobs, prices, profits and the rest; the market’s eye is more about the future. Christmas sales were reported to be record high, while the markets are fluctuating by vast amounts.
· The economy is probably headed for “correction” after years now of growth, if not this month, soon, meaning that we could face recessionary trends in the coming year.
· The jumpiness we are seeing comes about, in great part, as a result of moves, many of them bungled moves, by President Trump, who trusts his gut over actual information.
Over the last month or more, “markets have whipsawed over whether we do or do not have a trade deal with China (we don’t) and whether President Trump will further jack up tariffs on Chinese-made goods (still unclear),” argued Catherine Rampell of the Post. Furthermore, threats to fire Fed chairman Jerome H. Powell, whom Trump appointed, over slight raises of the basic borrowing rate (today they say Powell’s job is 100% certain), and a badly gauged set of phone calls to the nation’s top banks by Treasury Secretary Steve Mnuchin about bank liquidity when there is no known problem, raised concerns in the markets, driving the losses.
Add to that the dismissals of Defense Secretary James Mattis and Chief of Staff John Kelly Jr. and you start to see the pattern of reaction to a lack of stability in American leadership. Market volatility is a common reaction to uncertainty.
Rampell summarizes that “Virtually every independent forecaster foresees a slowdown once the sugar rush of Trump’s tax cuts wears off in the next year or so. And in a recent survey of economists by the Wall Street Journal, more than half predicted that we’d have a full-blown recession by 2020. Statistically speaking, given how long the economy has been growing, a recession is overdue — and the eventual collapse may bear Trump’s fingerprints. After all, his new trade barriers have lifted manufacturing costs, closed off markets and clouded the future for American firms with global supply chains.”
The very things that Trump sees as driving America’s economic gains — tariffs and withdrawal from trade agreements and tax cuts favoring its corporations — are now being seen as drivers of uncertainty and depressing confidence.
“Economists say Trump’s trade war is the biggest threat to the U.S. economy in 2019. In loonier moments, the president has also threatened to default on our debt, ramp up the money-printing press, reinstate the gold standard or deport all 11 million undocumented immigrants. Some of those policies would ignite not just a recession but an immediate, global financial crisis,” the Post analysis suggested.
In addition, chances are good for much more climate-related catastrophe by wildfires and stronger hurricanes because of White House denial of Climate Change. And, as The New York Times has outlined the role of global slowdown involving U.S. markets.
“The combination of erratic behavior from the president and a thinly staffed government in the United States; the potential crises facing other major economies; and the lack of trust amid allies and major trade partners could make routine economic challenges turn into something worse,” argued The Times.
That contention — that even if Trump is not the direct cause of economic problems, he will worsen them — is appearing in more and more places.
“There are, alas, many ways the administration is likely to bungle a recession response — it may have even done so already. The first issue is that Trump has already shot most of our fiscal bullets, leaving us with less ammunition when we actually need it,” said Rampell. We’ve already cut taxes, for example, or increased public spending.
Trump has widened deficits rather than try to pay down debt, adding $2 trillion over the next decade through tax cuts and spending increases. Now, with gaping budget holes, it will become much harder to provide fiscal stimulus when the time comes. Trump is likely to oppose more spending packages except for those that promote his anti-immigration Wall.
As he tweeted recently, Trump sees himself as a “Tariff Man”; he thinks import duties make America richer by shielding struggling industries from foreign competition.
There also is the problem of our deteriorating international standing. In the last financial crisis, having good relationships with foreign central banks, finance ministers and other leaders abroad proved crucial for coordinating fiscal and monetary responses. Instead, Trump has picked trade wars with adversaries and allies alike. He’s insulted foreign leaders, such as Canadian Prime Minister Justin Trudeau as “dishonest & weak”), and the Syria withdrawal shows he can be an erratic, unreliable partner, with a dubious grasp of basic issues.
Trump may be suspicious of any multilateral response to a global downturn. The Trump administration is short on economics talent.
It’s not a pretty picture. But more importantly, it is not a simple picture.