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A U.S. recession looks less likely in 2020, boosting Trump’s chances of reelection

President Trump at a November rally in Chattanooga, Tenn. (Jonathan Ernst/Reuters)
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A noticeable shift has taken place on Wall Street and among many economists and business leaders in recent weeks: Fears of an imminent recession have faded and been replaced with cautious optimism, especially about 2020, a trend that bodes well for President Trump as he seeks reelection.

The International Monetary Fund is a good example. It made headlines last week when it slashed its global growth forecast to the lowest pace since the financial crisis, but its outlook is not as gloomy as it sounds. The IMF also predicted a rebound later this year and slightly stronger growth next year for the world economy, which should be a positive for the United States.

“After the weak start, growth is projected to pick up in the second half of 2019,” IMF chief economist Gita Gopinath wrote in a blog post.

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The IMF isn’t alone in its optimism. The U.S. stock market had the best first quarter since 1998 and is now within striking distance of hitting an all-time high. Goldman Sachs says the likelihood of a recession in the next year has been cut in half, to 10 percent.

There’s a plausible story to tell that explains why this optimism has taken root: A U.S.-China trade agreement looks likely, the Chinese economy appears to be stabilizing, and the Federal Reserve (along with other central banks) has shown it will do whatever it takes to keep this expansion going.

Many of the major fears that drove the stock market down at the end of last year and prompted anxiety about a U.S. and global recession by 2020 have subsided. Instead of a recession, some are now talking about an “upside surprise” in which the U.S. economy could grow faster than expected, especially if businesses start to spend more as Trump’s trade war cools and the Fed doesn’t raise interest rates.

“The economy could grow more than 2 percent this year. I think that’s going to be the big surprise,” said Scott Minerd, global chief investment officer at Guggenheim Investments.

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Almost no independent experts say the economy will achieve growth above 3 percent in 2019 and 2020 as the White House predicts. But most forecasters are now in the range of 2 to 2.5 percent for 2019 and around 2 percent for 2020, which is probably good enough to keep unemployment low and wages rising at a robust pace.

How the economy fares in spring 2020 is likely to play a large role in Trump’s reelection chances, according to election experts such as Larry Sabato of the Center for Politics at the University of Virginia. The best guess now is that the economy in early to mid-2020 won’t produce the “huge” growth Trump likes to boast about, but there’s a decent chance it will be doing well enough to give him an edge against his Democratic opponent.

“If unemployment is still 3.5 to 4 percent and gas is still $2.75 and the stock market is still near a record high, then the economy is probably at the president’s back or at least not a head wind,” said Mark Zandi, chief economist at Moody’s Analytics. “If you plug that scenario into our election model, Trump wins or it’s close.”

Predicting where the U.S. economy is headed is notoriously difficult, perhaps even more so now, when it’s showing clear signs of slowing from the robust pace of growth last summer. And it’s unclear whether the nation is experiencing a slight deceleration or something deeper.

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On the upside, U.S. companies continue to hire at a robust pace and wages are rising, including for lower-skilled workers, which should make Americans comfortable enough to keep spending. The housing market is also showing signs of a rebound, another indication that people are still confident about the economy and their personal finances.

China, a nation Trump often berates, also is providing a boost to the global and U.S. economies by stimulating its own. The world’s second-largest economy, China said Wednesday that growth was 6.4 percent in the first quarter, slightly better than expected and a sign that China has stabilized despite the trade war.

But not all is well. The U.S. manufacturing sector has had a noticeable slowdown this year, and business and consumer sentiment, while still high by historical levels, is down from where it was a few months ago. Europe also continues to look weak and has to sort out Britain’s exit from the European Union in the fall. A “no deal” Brexit situation would be “the first time in about 45 years or so that we’ve had a large negative supply shock to an advanced economy,” said Bank of England Governor Mark Carney.

Diane Swonk, chief economist at Grant Thornton, said: “We don’t know how to time recessions, but the list of things that could trigger one is getting longer, not shorter. A lot of land mines remain.”

Trump has repeatedly accused the Fed, especially Chair Jerome H. Powell, of dragging the economy down by raising interest rates too quickly last year. (The Fed raised interest rates a full percentage point.) But economists, investors and business leaders no longer see the Fed as a worry now that Powell has indicated the central bank is “on hold” and unlikely to raise rates again this year.

With the Fed on the sidelines, Trump is likely to play a large role in whether the economy and markets beat expectations or disappoint, based on what happens with trade and the federal budget. On trade, he has dubbed himself “tariff man,” sparking fears that his trade war won’t end. Many are now asking: After Trump finalizes a deal with China, will he turn his ire on Europe or Japan?

The Europeans “barely take our agricultural products and yet they can sell Mercedes-Benz and they can sell everything they want in our country,” Trump said Monday, signaling his ongoing desire to reduce the U.S. trade deficit with Germany. “It’s not fair.”

Trump has yet to remove any tariffs he has put in place. Even the steel and aluminum tariffs on Canada and Mexico, which he said were a bargaining tactic, did not change after the North American Free Trade Agreement was revised last fall and became the U.S.-Mexico-Canada Agreement.

“All of the optimism about the economy assumes the U.S.-China trade conflict is rolled back and Mr. Trump doesn’t start imposing auto tariffs on the E.U. and Asia,” said Joseph Brusuelas, chief economist at the accounting firm RSM.

Trump’s best chance to spur the economy might be striking a budget deal with House Speaker Nancy Pelosi (D-Calif.) in September. The federal budget is supposed to be cut for the next fiscal year in a process known as sequestration, but Pelosi and Trump could easily keep funding levels the same as this fiscal year’s — or even go a little higher.

“The White House is going to have to come to the table with Speaker Pelosi,” Brusuelas said. “The only tool you can use to boost the economy before the election is government spending, especially if the Fed stays on hold.”


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