Trump has nothing to fear but fear itself. And that’s the problem.

Why We Wrote This

Fear can be a powerful driver of behavior, especially when it comes to the economy. Can a new budget deal, a rate cut, and no escalation in the China trade war keep a downturn at bay?

Alex Brandon/AP
White House chief economic adviser Larry Kudlow speaks with reporters July 23, 2019 in Washington. The economy has been the Trump administration's strong point, and the White House is doing what it can to eliminate uncertainties driving fears of recession.

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This week, President Donald Trump compromised on his vow to cut federal spending, agreeing to a sweeping two-year budget deal that prevents automatic spending cuts, raises the debt limit, and pushes off the possibility of a government default until after the election. The U.S. House passed the bill today, despite fierce opposition from fiscal conservatives who pointed out the bill would add substantially to the national debt.

The budget deal is an attempt to eliminate some of the uncertainties contributing to fears of an imminent recession. The economy has been the president’s strong point throughout his term, and the White House is intent on keeping it that way through the 2020 election.

Nevertheless, fears of recession are growing, especially in the business community. The big question is whether that uncertainty will spread to consumers, who continue to buoy the economy with robust spending. 

The remaining big uncertainty – at least in terms of the administration’s economic policy – is trade, especially the trade war with China. And here, trade experts say, the answers are not so easy.

Imagine you’re president, facing reelection in a little over a year. Your approval numbers have never topped 50% and the opposition is all fired up. You have one, well, trump card.

The economy.

It’s not just that it’s now the longest expansion in U.S. history or that unemployment is at 50-year lows. The economy has also done measurably better under President Donald Trump than it did under his predecessor, Barack Obama. And a majority of voters are giving him credit for that.

But if Mr. Trump hopes to keep the expansion going – at least through Election Day – he is going to have to address the uncertainty and recession fears that seem to be growing. Fighting uncertainty will be especially hard for Mr. Trump, since a good chunk of it stems from his own policies. 

“We’ve definitely seen greater uncertainty building in the economy,” says Joe Song, senior U.S. economist with Bank of America Merrill Lynch. “Uncertainty is just bad for business. People get defensive when they don’t know what to expect down the road. So that’s going to weigh on growth the second half of this year.”

Tomorrow, the government will release its first estimate of the past quarter, which economists expect will be a little over 2%. That’s not terrible, but it’s more Obama-level growth than the average 2.9% that Mr. Trump has enjoyed so far in his presidency.  

And economists expect growth to slow further in the coming months, which puts the administration in a dilemma. Should it continue pushing its signature economic goals with high-risk tactics that could temporarily slow growth further or even tip the economy into recession? Or should it compromise in hopes of keeping the economy stable?

This week, Mr. Trump compromised on his vow to cut federal spending, agreeing to a sweeping two-year budget deal that prevents automatic spending cuts, raises the debt limit, and pushes off the possibility of a government default until after the election. The U.S. House passed the bill today, despite fierce opposition from fiscal conservatives who pointed out the bill would add substantially to the national debt.

“House Republicans should support the TWO YEAR BUDGET AGREEMENT which greatly helps our Military and our Vets. I am totally with you!” the president tweeted Thursday morning.

By eliminating the possibility of a government default in September, Mr. Trump is removing one big uncertainty for the stock market and the business community. Next week, the Federal Reserve is expected to remove another source of uncertainty. Fed watchers anticipate it will cut interest rates in a preemptive strike against an economic slowdown. Six months ago, economists worried that the Fed would raise rates, which tends to slow growth. 

The economy is clearly the president’s strong point. This week’s Reuters/Ipsos poll is typical. A majority of Americans disapprove of him: 56% to 41%. At the same time, a slight majority (53%) approve of his handling of the economy and employment and jobs. Those were the only issues in which Mr. Trump enjoyed a majority.

Nevertheless, fears of recession are growing, especially in the business community. Just under half of U.S. chief financial officers believe a recession will begin within a year, according to the latest Duke University global survey of CFOs. Morgan Stanley sees a 1 in 5 chance of recession. The New York Federal Reserve Bank puts it at 1 in 3, based on a model focused on those rare periods when long-term interest rates are lower than short-term rates. 

That “yield curve inversion” has now been in place for three months, a condition that since the 1960s has reliably foretold the coming of a recession within the next 18 months. The last time the bank’s model flashed so ominously was 2007, months before the beginning of the Great Recession. 

The big question is whether that uncertainty will spread to consumers, who continue to buoy the economy with robust spending. 

“We won’t see that until we start to see a real slowdown in hiring,” says Mary Lovely, an economist and trade expert at Syracuse University in New York.

Hiring did slow in May, but it rebounded smartly in June, according to federal data.

The remaining big uncertainty – at least in terms of the administration’s economic policy – is trade, especially the trade war with China. And here, the answers are not so easy, trade experts say. 

“Trump’s choice in the end is going to be a weak agreement [with China] or continue the war,” says William Reinsch, a senior adviser and trade expert at the Center for Strategic and International Studies in Washington, D.C. “And those are both politically complicated for him. If he makes a weak agreement, the Democrats will say ‘weak agreement, poor negotiator, soft on China.’ ... If he continues the war, they’ll say: ‘a failed policy, enormous collateral damage that’s produced nothing.’”

Although Mr. Trump has more economic leverage over China than vice versa, it’s China’s political leverage over Trump that may ultimately lead to a continuation of a low-level trade war rather than an escalation in tariffs, which the president has repeatedly threatened. 

“This is part of their dilemma,” says Mr. Reinsch. An escalation in the trade war would mean applying tariffs to consumer items, such as smartphones and laptop computers, and trigger more retaliation from the Chinese. That could cause not only a recession, but also a big escalation in consumer electronics prices in the United States. 

“If the price of your phone goes up $250, you may pay attention,” he adds. 

One interim step that could be made, trade experts suggest, is that U.S. tech companies could be allowed to resume sales to Chinese telecom giant Huawei in exchange for China resuming purchases of U.S. farm goods. That would placate Chinese fears of being shut out from U.S. technology and lessen the financial losses of U.S. farmers, a big Trump constituency.

Exemptions allowing U.S. companies to sell to Huawei should be decided in a few weeks, U.S. Commerce Secretary Wilbur Ross told Bloomberg earlier this week. 

Editor's note: This story was updated at 5:40 p.m. to reflect the passage of the budget deal by the House of Representatives.

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