As always, the economy will be a major factor in the next election. However, the relationship between the status of the economy and the election is doubtlessly to some degree asymmetric. If the economy is in tough shape or perceived to be in trouble, it means trouble for the party in power. This situation was doubtlessly a major factor in the elections of Bill Clinton in 1992 and Barack Obama in 2008.
In contrast, if the economy is seen as strong, it doesn’t guarantee that the party in power is not in trouble. The strong economy of 2016 was not sufficient to maintain the presidency in the hands of the Democrats. Although the economy was strong during Obama’s tenure, candidate Trump capitalized on its underlying weakness, the growing inequality of income and wealth.
The implication for the 2020 election is that Trump can’t depend on a strong economy for his reelection. But a significant slowing of growth or, especially, impending or existing recession, will put him in deep trouble, especially as the underlying weakness of income inequality still exists. The further implication is that Trump must do everything he can to maintain a strong economy. Trump will continue to credit himself for the strong economy he inherited, claiming that he inherited “a disaster,” and turned it around all by himself. In any case, he will be judged on the existing status of the economy in autumn of 2020. In this sense, Trump cannot afford a weakening economy.
Economists cannot predict the future but neither can anyone else. We can discuss some factors to consider. In general macroeconomic terms, the economy remains strong. Unemployment is at a 50 year low at around 3.6%. Inflation remains slightly below the Fed’s target of 2%. Financial markets, though not a good indicator of the real economy, are near all-time highs. Nevertheless, troubles do exist, and more are on the horizon. The May new jobs report was at 75,000, much below the expected 180,000. Although many analysts had expected slowdowns after several years of job gains, few expected that much of a slowdown. Job growth was in professional and business services, health care, construction and manufacturing. Employment in retail sales declined.
Growth in business equipment spending declined during the 1st quarter of 2019. Persistent weakness remains with stubborn wage growth. Although hourly earnings rose 3.1%, this was lower than expected, and doesn’t begin to compensate for the decades long deterioration in real (inflation adjusted) income of working people. There has been consistent worry over flattening of the yield curve — the rise of short term interest rates relative to long term rates. In a rational world with a healthy economy, long term rates would be higher than short term rates. While an inverted yield curve doesn’t necessarily forecast a recession, recessions inevitably are accompanied by an inverted yield curve. Although it remains unclear whether the relationship between the yield curve and recession is causation or correlation, a flattening yield curve is a source of worry.
In addition to all this, the brouhaha over international trade and tariff battles with China and Mexico is problematic. Trump slaps tariffs on Chinese goods and China retaliates with tariffs on American farm products. So far, farm producers and politicians of farm states seem remarkably patient and tolerant, citing appreciation of long run goals of the Trump Administration. Some farmers purport to see themselves as “soldiers in the broader war,” insisting, or at least hoping, that their economic suffering is temporary and that they will be better off in the long run. However, those who are not financially strong may lose their farms in the long run.
Republican tolerance of tariffs on Mexican goods appears to be much shorter. The supply chains for production inputs of automobile manufacturing, for example, are complex. Trump’s insistence that his policies would rapidly induce firms to move production back to the US is unrealistic. Trump’s Republican politicians — they are indeed his — are breaking with their longstanding silence and obedience, insisting that his tariffs on Mexican products are harmful to US producers and consumers.
Trump appears to be backing down on tariffs on Mexican products that he has tied to Mexico’s cooperation on immigration policy. He continues his strategy of creating a problem, tweaking it a bit, and claiming credit for solution and a “tremendous achievement.” Concern over a softening economy has implications for Fed Chair Jerome Powell and policy on interest rates. The Fed had previously indicated steadily rising interest rates over 2019. But sputtering financial markets at the end of 2018 brought about a reassessment, resulting in a pause in this process. Further recent worry about the economy resulted in Powell’s language about further reluctance to raise rates, and even caused speculation about a decline in rates. This language is responsible for the recent uptick of stocks.
The reaction of financial markets to talk of the Fed’s softer stance has two implications. First, it appears that Wall Street pays more attention to interest rates than to the strength of the economy. It seems that Wall Street prefers low interest rates and a softening economy to a stronger economy and accompanying rising short term rates. Second, this seemingly perverse relationship between strength of the economy and financial markets affirms the exercise in futility of investors attempting to time the market.
The longstanding advice of legitimate financial advisors remains solid: continue investing a steady amount to retirement funds regardless of the status of financial markets. This will result in dollar cost averaging, ensuring that money is invested when markets are low. While the status of the economy will surely influence election strategy, there remain the long run structural problems of the economy that are independent of the business cycle.
Long neglected structural problems of the economy demand attention that has long been lacking.
— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears Saturdays in the Monroe Times.
