Is Trump's goose cooked on the economy?
The impression you get from a recent piece in Politico is that, yes, the Trump economy is in for tough sledding ahead:
President Donald Trump, already in a grumpy post-midterm mood, faces a growing list of economic problems that could irritate him even more next year. Chief among them is a withdrawal from the economy’s sugar high...
“The first punch will be the lag effect of rising interest rates. Rates work slowly, but they do work eventually,” said Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics. “And the second will be that by 2020, without a further package from Congress, the stimulus will be done. You put all these together and it’s a little like Wile E. Coyote running over the cliff. You look down, and the ground you thought was under you suddenly isn’t there anymore.”
Read the whole thing here. But, let me make a few points of my own first.
Let's start with the Fed again here
What Politico is saying is very much in line with what I was telling you two days ago about the political economy I expect in 2020. Like Shepherdson, I start with the Fed as well. And, as I stated on Tuesday, the calculus at the Fed has become more dovish because the economic outlook is now weaker.
I think Pedro da Costa does a great job of distilling this over at Forbes:
Federal Reserve officials appear to believe they can keep raising US interest rates well into 2020.
There’s just one problem: Financial markets think a slowdown in economic growth from this year’s stimulus-boosted pace will force policymakers to rethink their monetary tightening as soon as early next year.
Here’s the Fed’s most recent "dot plot," which sketches out officials’ individual forecasts for the likely path of rate increases and shows a median estimate for several hikes next year and into 2020.
Steven Blitz, chief US economist at TS Lombard, says a December rate hike is basically a done deal but "the question is 2019. Here, the outlook is less certain than the dot plot suggests."
After a November meeting that yielded no shift in policy, the Federal Open Market Committee "noted the slowdown in business spending and long ago the statement stopped mentioning the slowdown in housing – which continues to weaken..."
One of Pedro's sources says the Fed may end up declaring victory in March and call it a day. That's essentially two hikes away, one in December and one in March, where the Fed is talking about 4 more by the end of 2019 and more in 2020.
My view: we would have to see the macro outlook deteriorate materially from here for that to be the case. Moreover, Powell doesn't want to look like he's caving to Trump's bullying. I'm sceptical of the concept that we are done 50 basis points from now.
But the doubts about the Fed tell you there are doubts about the real economy
These numbers from the Politico piece tell the story:
“I expect fiscal policy will still be stimulative in 2019, but not as stimulative as in 2018,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics. “In round numbers, fiscal stimulus is adding maybe three-quarters of a point to GDP growth in 2018, will add maybe half as much again in 2019 and be close to neutral in 2020.”
Deutsche Bank estimates that fiscal policy will remain mildly positive in 2019 but turn into a drag of about 0.3 percent on the economy by 2020. “You should expect GDP growth to slow as we get into the second half of 2019 and in particular in 2020,” said Torsten Slok, Deutsche’s chief international economist.
In terms of both direction and order of magnitude, this is on the money. We should expect slowing. And when that slowing occurs, it will do so against a negative backdrop fiscally since the Democrats will control the House. And Nancy Pelosi is even talking about bringing Pay-go back, meaning a fiscal rule that requires new spending to be met with incremental tax revenue. And, of course, the Fed is raising rates. Not all of that tightening has worked its way through the system.
So, 2019 is the time when we will see whether tax cuts for corporations and the wealthy can lead to increases in business investment that permanently bolster growth into the 3% range. That's what the White House has been saying would happen.
My view is that the White House will be disappointed. And so with the stimulus petering out, on the economy, Trump's goose is cooked.
P.S. - I am due to have drinks tonight with Jonathan Tepper of Variant Perception. He has a new book out called "The Myth of Capitalism" which chronicles how increasing industrial concentration is eroding the dynamism of economies and contributing to income inequality. I have been reading the book and will be writing a review for it in the coming days. Expect it soon!