A 1.5% Economic Growth Pace — How Will the White House Respond?
Author: Greg Valliere
February 3, 2020
THE GROWING LIKELIHOOD OF A SOFT FIRST QUARTER poses a threat to Donald Trump’s re-election prospects. It’s not his fault that the economy may slow because of the coronavirus and problems at Boeing, but if GDP growth suddenly gets a 1-handle, he will be forced to act.
WE STILL DON’T THINK A RECESSION IS LIKELY, but the economy is entering uncharted waters as estimates skyrocket on the number of people likely to contract the virus. The fatality rate is only about 2%, far lower than SARS nearly two decades ago, but the coronavirus has not peaked and has effectively shut down the Chinese economy.
THE VIRUS AND BOEING could shave half a percentage point off first quarter U.S. GDP, which means the economy may be growing by about 1.5% just as the presidential campaign is heating up. First quarter GDP figures are due on April 29.
FOR TRUMP, WHO PROMISED ECONOMIC GROWTH of 3% or better, a 1-1/2% pace will not be sufficient (the economy grew by 2.3% last year). Never mind that the weakness could end by summer, perhaps with a make-up, a 1.5% GDP pace this spring would give Democrats an argument that the economy is sluggish.
TRUMP KNOWS THAT A MEDIOCRE ECONOMY is the greatest threat to his re-election, so we expect him to focus on five themes, starting with tomorrow night’s State of the Union address:
1. Boasting: He’ll get over an hour of prime time TV tomorrow to declare that the U.S. economy is the strongest in the world, and the strongest ever. The latter point isn’t true, of course, but he’s a relentless salesman — and 68% of the public in a new
Gallup poll said the economy is in good shape.
2. Blame China: Just as Trump tightened the screws to stop Muslim immigration early in his presidency, he will have no hesitancy to block Chinese from entering the U.S. Relations between the two countries, already soured by the trade talks, will deteriorate further as Trump effectively seals the borders to all Chinese.
3. New policies: Trump is the ultimate Keynesian, so we expect him to unveil new tax and spending policies. Larry Kudlow will soon present a new tax bill to the
president that would establish a 15% rate for most of the middle class. Nancy Pelosi
and the House are unlikely to cooperate, but Trump will have a campaign issue.
As for the other aspect of fiscal policy — spending — the spigots will remain wide
open. Trump will call for spending restraint in his speech tomorrow night, but that will
be for show; outlays for everything — defense, money for a wall, domestic spending — are headed higher. And he’s itching to unveil a massive infrastructure program.
4. Bash the Fed: If the economy slumps this quarter, for whatever reasons, Trump will demand Federal Reserve rate cuts. The shocking plunge in the 10-year Treasury bond yield, to about 1.5%, is a sign that the Fed may be getting behind the curve, and Trump will howl. He thinks he has the power to demote Jerome Powell from Chairman to mere governor; at the least, Trump will ratchet up the pressure.
5. Demonize the Democrats: Trump is calling Bernie Sanders a communist and he says the rest of party is socialist; this will be a major theme of Trump’s campaign rhetoric, as we’ll see at his rally tonight in Iowa, designed to grab the spotlight from the caucuses. The Democrats’ radical rhetoric in Iowa, pandering to the party’s left, is an enormous gift for Trump.
BOTTOM LINE: The coronavirus is a dramatic new factor in the U.S. economic narrative for 2020 — and Trump being Trump, he will react aggressively. He undoubtedly is concerned that the economy might be simply a modest plus in November, not the huge advantage that he’s counting on.
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