Trump’s tariffs, Powell’s economic policies risk recession
President Donald Trump’s tariffs and trade wars have triggered a significant slowdown in global manufacturing, and his reliance on the Federal Reserve to keep the economy afloat risks a major recession.
Despite record highs on stock indexes and low unemployment, many key economic indicators are flashing danger signs. Manufacturing, which Trump promised to revive, is already in trouble.
The U.S. Manufacturing Purchasing Managers Index, a critical gauge of economic health, has slowed dramatically since April to the lowest levels since September 2009. Factory operators are worried about tariffs strangling global trade.
“Respondents expressed concern about U.S.-China trade turbulence, potential Mexico trade actions and the global economy,” said Timothy Fiore, author of the latest report from the Institute for Supply Management.
On Monday, China reported the slowest economic growth rate
in 27 years, primarily stymied by the trade dispute with the United States. Trump’s tariffs have triggered a 26 percent drop in Chinese exports to the United States., but Chinese countervailing tariffs have cut U.S. exports to China by 27 percent.
European manufacturing is already in recession, with both France and Germany caught in a deep slump since April. The European Union relies on exports for growth and slowing global economic activity has led to fewer orders. Japan is also suffering for the same reasons.
Tariffs are a tax on international transactions, raising the cost of goods and hurting consumers, who have less money for discretionary spending such as buying the latest gadget, upgrading a kitchen or going out for dinner and a movie. Governments may pocket the tariffs as revenues, but that takes fuel out of national economies, particularly in the United States, where consumer spending accounts for about 70 percent of economic output.
The International Monetary Fund recently revised global economic growth predictions downward due to slowdowns in China, the U.S., EU and Japan. This slower growth is the reason cited by Federal Reserve Chairman Jerome Powell when essentially promising to lower interest rates later this month.
Normally, the Fed would not lower rates at only the hint of a slowdown when the unemployment rate is extremely low and stock indexes are setting records. This would typically be the time to raise rates, in part to stockpile ammunition to fight the next downturn..
The Trump administration, though, is far from normal. The president is pressuring Powell to lower rates and whip the economy into a gallop so that he has the upper hand in trade negotiations with China. Keeping the economy humming also boosts his chance of re-election.
Low interest rates encourage more borrowing and spending. A decade of low interest rates since the Great Recession has put the world in a precarious economic position.
Global debt totaled $246.5 trillion in the first quarter of 2019, more than four times the value of global economic output. Every person in the world would have to work for more than three years without pay to settle the current debt.
Governments have thrown fiscal responsibility to the wind and borrowed money to cut taxes and inject cash into the economy. Trump did it in December 2017 when he cut taxes and added an expected $1 trillion to the federal government’s debt.
The tax cuts provided a temporary boost, but they are wearing off. Since Congress is unlikely to grant another tax cut or increase government spending, Trump’s only other method to boost the economy is to strong-arm Powell into encouraging more borrowing.
In other words, the coming recession is a crisis of Trump’s making.
Instead of gathering allies to isolate China, boost trade and force President Xi Jinping to compromise his authoritarianism to join the global trading system, Trump has either threatened or imposed tariffs on almost every trading partner and his strategy is stalling the global economy.
Instead of reducing the federal debt, Trump slashed taxes and left spending untouched. The U.S. must now borrow more, and eventually, the interest on the federal debt will eat away at the nation’s ability to pay for essential services. Debt is a tax on future generations.
Trump has turned Powell into a patsy. If Powell does the right thing and leaves interest rates unchanged, Trump will blame him for the slowing economy. If he cuts rates and encourages borrowing, history will blame him for the ensuing crisis.
Neither Trump nor his supporters will ever recognize their fingerprints on the coming mess.
Members of the National Association of Business Economists predict the U.S. will fall into recession by the end of 2020. Slowdowns are part of the economic cycle, but the severity of this recession will rest solely with Trump and Powell.