Trump's new problem: There's growing talk of a downturn in 2019
February 13 at 6:30 AM Email the author The White House's spending priorities for 2018 renege on President Trump's many promises to lower the deficit and keep Medicare and Medicaid spending without cuts. (Jenny Starrs/The Washington Post)
President Trump is beginning his second year in office with a high-risk strategy: Juicing the U.S. economy at a time when it already looks pretty healthy. As his latest budget, released Monday, makes clear, Trump wants growth of 3 percent â" or more â" a year for the next seven years, a feat that hasnât happened since Ronald Reagan was president in the 1980s.
Most economists say Trumpâs economic dream is virtually impossible. The latest Survey of Professional Forecasters, for example, doesn't predict growth will hit 3 percent at all in Trump's first term.The United States is in adifferent place today than it was thr ee decades ago, many say. The population is much older now, making it more difficult to sustain higher growth, especially without additional immigration or some sort of technological revolution that would make American workers the most productive they have been since the 1960s.
But Trump doesnât like being told no. Heâs made a career out of defying the odds, and his âTrumponomicsâ recipe of cutting taxes and hiking spending is meant to spur so much additional business investment that productivity can hit record levels. In theory, that would then boost growth and wages further.
His budget predicts the longest expansion in U.S. history, with moderate inflation and unemployment falling to 3.7 percent in 2019, the lowest level since 1969. Some economists, however, say the more likely result is growth picks up for a year or so and then a downturn hits. By then, the U.S. government would be even deeper in debt with less money to spend to revive the economy.
â This is a joke,â said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget. âI would love if we had 3 percent growth for two years, let alone seven years, but we have an aging population and there is no plausible story I can tell where weâre on a path toward sustained economic growth at that level.â
Friction over these contrasting views of how Trumponomics is likely to play out are causing some of the stock market whiplash. Thereâs broad agreement that this year looks good. Thereâs a lot of disagreement about what comes in 2019 and beyond.
âThe stock market gyrations weâre seeing now might be a foreshadowing of some kind of downturn,â said Kristina Hooper, chief global strategist at Invesco. âIt seems likely before the end of 2019, we will probably see some kind of economic slowdown.â
Increasingly, Wall Street banks and independent economic researchers are starting to flag doubts about the health of the T rump economy, further fueling the belief that a downturn could hit in 2019. The thinking is that the economy is likely to overheat, forcing the Federal Reserve to have to hike interest rates quickly to prevent inflation, where prices rise rapidly on everything from rents to food to gas. Once the Fed starts pumping up rates, business and consumers are likely to pull back their spending.
â2018 is likely to be as good as it gets,â said Paul Ashworth, chief U.S. economist at Capital Economics. âThe slowdown may not necessarily come in first half of 2019, but maybe the second half as thereâs a bigger drag from tighter monetary policy and the fiscal stimulus wears off.â
In a further strike on the Trump economy, Goldman Sachs said the presidentâs deregulation push is having little to no effect on the economy. âOverall, our results suggest that non-financial deregulation has had a limited impact on the economy to date,â the bank wrote in a report over the weeke nd.
Goldman's research follows on the heels of a Morgan Stanley report last week that looked at what 556 companies are likely to do with their tax savings. The survey found 43 percent intend to fatten dividends and share buybacks. The next most popular use of the tax money is likely to be mergers (19 percent said this). Only 17 percent anticipate more capital spending and only 13 percent think higher wages are likely. A Bank of America survey in August of over 300 companies found similarly pessimistic expectations for how the tax savings would likely be used.
Trump is counting on much of the tax savings going toward business investment. If business spending doesnât pick up, thereâs even less likelihood of years of great growth. Capital spending did pick up last year and small business confidence is at its highest levels since the Reagan era, but that optimism has to continue to fuel investment.
On the upside for Trump, growth came in stronger than the e xperts anticipated last year. Americans are feeling the uptick. The latest Quinnipiac University Poll found that 70 percent of Americans rate the economy as âexcellentâ or âgood,â the highest rating since the poll started asking this particular question in 2001. And for the first time in his presidency, more Americans credit Trump with driving the economic gains than former president Barack Obama.
But moods can shift quickly, especially if bond yields start rising and the stock market sells off for a prolonged period of time.
Trumpâs budget projects a lot more debt in the coming years, an oddity at a time of healthy growth when governments typically try to get their budgets back in line. Independent groups like the Committee for a Responsible Federal Budget anticipate the deficit will hit $1 trillion by next year, a record level at a time when unemployment is so low. The Trump Administration isnât quite that high, but even it anticipates a $873 billion defi cit this fiscal year and $984 billion in 2019.
Trump has abandoned his promise to balance the budget in the next decade. Instead, his latest budget runs a deficit every year. âThis is a step in the wrong direction,â said Doug Holtz-Eakin, president of the right-leaning American Action Forum and an economic adviser to GOP politicians.
Even with the large cuts Trump proposes for many programs that aid the poor, he still isnât able to balance the budget. In fact, the budget released Monday has $2.7 trillion lower revenue over the next decade than his first budget projection in May did, a seeming admission that the tax cuts would struggle to produce enough revenue to offset the costs.
âTheir budget effectively assumes that tax cuts donât pay for themselves,â said Jason Furman, a Harvard professor who was head of President Obamaâs Council of Economic Advisers.
Mick Mulvaney, Trump's budget director, argues the government would bring in more money because of the tax cuts than it would have without them.
"As long as we've got GDP growing fast ... the deficit will be going down," said Mulvaney, who used to champion balanced budgets as a congressman.
The Trump administration is on track to return to levels of borrowing not seen since the crisis. While demand from China, Japan and elsewhere in the world is still strong for U.S. government bonds, itâs a gamble. If foreign governments slow down their purchases, yields would likely spike.
Trumpâs budget assumes borrowing rates for the 10-year Treasury bonds will remain low, even as growth picks up and unemployment falls further. The budget predicts the popular 10-year U.S. Treasury bond will have a 2.6 percent yield this year. At the moment, the yield is over 2.8 percent, meaning borrowing costs are higher than the administration wants.
For now, many economic metrics look good. But the Trump administration foresees an even stronge r economy for years to come. Outside economists see a rising possibility of a downturn. Trump is hoping for a Reagan-like economy. He might end up with a President George H.W. Bush one, where a slowdown comes just as heâs campaigning for a second term.Source: Google News