US economy

The problem with Trump’s inverted curve


Here’s a thought to make Donald Trump’s ill-wishers squirm. The US economy will continue to fire on most cylinders for the next 18 months and Trump will be re-elected. No matter who Democrats put up, whether it is the moderate Joe Biden, or the radical Elizabeth Warren, they cannot defy political gravity.

Only two US presidents in the last century have failed to be re-elected to a second term — Jimmy Carter and George HW Bush (I am excluding Gerald Ford, since he wasn’t elected to a first one either). Both of them were battling recessions. History tells us that a first term president with a growing economy would have to do something radical (be impeached, for example, or start a disastrous war) to be ejected from office. The best assistance the Democratic nominee can wish for is thus entirely out of his or her hands — a sharp economic downturn.

I have always thought Democrats were too invested in predictions of a Trump recession — as though the economy were a morality play. I wrote a column on this last December. The theory went that Trump’s $1.5tn tax cut would rapidly expire in early 2019 assisted by an increasingly inflation-anxious Federal Reserve. With growth of 3 per cent in the first quarter of this year and unemployment at a fifty year low, that has yet to happen. Indeed, the Fed is as likely to cut rates next time as raise them. That is why we haven’t been hearing Trump’s usual complaints about Federal Reserve chairman Jay Powell. But harbingers of a possible recession are back on the horizon. As the New York Times’ Neil Irwin writes the Treasury yield curve inverted this week for the second time this year. It is now cheaper to borrow money at ten year rates than for it is for one month. Inverted yield curves are a classic forerunner of recessions.

No one can read the bond market’s mind. But it is safe to say that fears of a more prolonged, even epochal, US-China trade war are weighing heavily on investors’ minds. So does the prospect of a global “splinternet” with the world’s big telecoms systems increasingly dividing between Chinese and American spheres. None of which would be good for growth. All of which, therefore, would be helpful for Democratic 2020 prospects. The fact that most of the Democratic contenders are to the left of Trump on China trade (or is it the right?) will dampen his temptation to cut an easy deal and proclaim victory. That is one story. Here is the Democratic nightmare scenario. Trump cuts a just-about plausible deal with Xi Jinping at the G20 summit in Tokyo next month. The stock market rallies. Concerns about disinflation prompt the Fed to cut rates in September — and again in December. The stock market rallies more. We begin 2020 much as we did 2019 — with roaring macroeconomic numbers. Odds of a Trump re-election look strong.

So much for the economy. There is a very different story, which is that Trump is so intensely disliked that he would lose even if the economy were strong. History also offers some guidance here. No president with approval ratings below 50 per cent ever wins. Trump’s ratings have never come close to halfway. If Gallup is the right guide, then Trump has already lost. I would not bet on it. However, I would not bet on anything right now.

Rana, I know you have strong views on the nature of the Trump economy. I believe you also think growth numbers are not as informative as they used to be: many Americans are mired in personal recessions regardless of what the statistics tells us. If you had to put some skin in the game, would you bet on a recession before November 2020?

Recommended reading

My column this week looks at Robert Mueller’s quintessential G-man’s farewell — and how it makes Nancy Pelosi’s task of holding off the impeachment tide that much harder. Shorter Mueller: “Could you please just read what I wrote?” 

My colleague Robert Shrimsley pours well-deserved cold water on the hope — some would say fantasy — that Boris Johnson will metamorphose into a Remainer if and when he becomes prime minister. We should have learnt by now to take populists literally as well as seriously, Robert reminds us.

Talking of “splinternets”, my colleague John Thornhill chronicles the unnerving spread of facial recognition technology and the urgency of coming up with some kind of regulatory constraints.

A man in Britain was recently fined for covering his face in front of a surveillance camera. “An alarming example of how far and fast our civil liberties have been eroded”, writes John.

Rana Foroohar responds

Love the headline, Ed (I keep reading even more into your double entendres than I should, I suspect). As for your question — yes, I’ll bet on recession before 2020, for all the reasons that you posit. And yes, I can also buy the opposing case as you lay it out. But my own bet has more to do with history — recovery cycles tend to last between 8 and 11 years, and we are just at the end of what’s statistically likely for this one. I’ll caveat that by saying that I do think that the effects of both tech-related deflation and extreme monetary policy may have shifted the recovery cycle in new and unexpected ways.

I’ll also make one contrarian prediction. I think it’s possible for there to be a big market correction, and for Trump to still win. Think about it. The 46 per cent of so of the population that appears to be with him no matter what he does is also much less affected by equity market appreciation than the coastal elites, who own most of the stock. They’ll be less affected by an asset bust too (although it depends on how quickly it effects the real economy and job creation). I think that this time really could be different — not only in terms of the yield curve and the length of the recovery cycle, but also in terms of whether it really is “all about the economy, stupid.” Nationalism may prove even more powerful than the markets. 

Your feedback

We’d love to hear from you. You can email the team on swampnotes@ft.com, contact Ed on edward.luce@ft.com and Rana on rana.foroohar@ft.com, and follow them on Twitter at @RanaForoohar and @EdwardGLuce



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