Trump should worry about economic trends

Not so long ago, the economy was President Donald Trump’s greatest strength. Now it is becoming his greatest liability.

At the end of spring, the data were mostly strong but with some ominous signs for the president: A lot of the economic trends were eerily similar to those in 2015 that doomed Democratic presidential chances in 2016.

Political scientists have found that the performance of the economy in the months leading up to a general election is one of the most powerful indicators of how the incumbent party will do. Despite Hillary Clinton’s lead in the polls and Trump’s sky-high unfavorability ratings, prediction models that incorporated the economy were among the few that projected a Trump victory in 2016.

As fall approaches, the outlook for the president has declined. There are two factors at work. First, the trade war has taken an increased toll on growth. Second, data revisions have revealed that the economy peaked earlier, and began to decline sooner, than originally estimated.

Consider 2017’s Tax Cut and Jobs Act. The boost it provided the economy was always expected to fade in 2019. Now, however, it appears that the improvement was both stronger and more fleeting than expected; it began to decline almost as soon as the trade war began in March 2018.

Year-over-year GDP growth, meanwhile – the economic indicator that figures most directly into political scientists’ models – is now tracking well below what it was leading up to the 2016 election. As the president himself recognizes, the economy has been flashing signs of an outright recession.

That may be enough to spell trouble for Trump. An actual recession isn’t necessary to turn the models against the incumbent; all it takes is a near-stall similar to the one the economy experienced in 2016. And the more high-frequency data support the notion that a stall, at least as bad as what was on the horizon four years ago, is now a near certainty.

Job growth is down sharply. Over the last year the economy has created an average of roughly 170,000 jobs a month. Further decline is expected based on last month’s reading of a 130,000 gain in payrolls.

To make matters worse, approximately 20,000 of last month’s jobs were temporary census jobs, which will be gone by the end of next summer. The net monthly increase of 105,000 is about equal to what the Federal Reserve estimates is necessary to keep up with population growth and the re-entry of discouraged workers into the labor force.

That helps explain why the unemployment rate has stalled despite continuing job growth. To be clear, the current unemployment rate of 3.7 percent is extraordinary, the best since the 1960s. Unfortunately for Trump, voters are fickle. What matters more to them is the trend, as opposed to the level.

The one bright spot for the president continues to be business investment, which has held steady over the past months. That may seem surprising given the Fed’s emphasis on investment as a weak spot in the economy. The Fed, however, had been expecting business investment to rise further in response to the 2017 tax cut. Instead it has leveled off, leaving the economy exposed to other shocks. Trade uncertainty also blunts the effectiveness of interest rate cuts, the Fed’s primary tool to boost the economy.

For his part, the president seems to recognize the impact of his trade policies. As November 2020 approaches, he may find that the best way to improve economic growth – and his own re-election chances – is to find a way out of the trade war.