The Post reports: “U.S. stocks plummeted Wednesday after the inverted yield curve, one of the most reliable indicators of a recession, sparked a new wave of investor fears, erasing the short-lived bump from Tuesday’s trade easing.” That means for the first time in 12 years, short-term rates on U.S. bonds are higher than long-term bond rates. It’s a sign investors are fleeing to the safety of the bond market; with high demand for those bonds, the rates drop. “This phenomenon, which suggests investors’ faith in the economy is faltering, has preceded every recession in the past 50 years. It isn’t a sure thing, but it’s one of the more reliable signs that something is amiss in the economy.”
Even after President Trump pulled back on his threat to impose new tariffs on China on a range of consumer products, the market’s still falling. (“The warning sign dealt another blow to markets in a time of year that is already notoriously tough on stocks. By late morning, the Dow Jones industrial average had fallen more than 600 points. ")
This doesn’t mean there will definitely be a recession, and, if there is, we don’t know when it will hit and how severe it will be. However, several things are clear.
First, a downturn in the economy before the election will very likely shatter Trump’s hopes for reelection. Presidents in economic downturns generally don’t get reelected, and if the president already is widely disliked and has no other notable accomplishments, an economic decline may be an insurmountable problem for the incumbent.
Second, it will be very hard for Trump to avoid blame for the downturn, given the immediate cause of economic volatility is his misguided trade war. Like many economists at Wall Street firms, Michael Strain at the American Enterprise Institute writes, “[Businesses’] paralyzing uncertainty is driven by the president’s veering from one position to another. Businesses seem increasingly convinced that he doesn’t understand the basics of international economics.”
He explains, “Trump bemoans the relative strength of the dollar one day, declaring China a currency manipulator, and the next he praises dollar-strengthening inflows of foreign investment. With such a tenuous grasp on the facts of the situation, how can he make predictable policy? How can businesses anticipate what he’ll do?” Moreover, despite spin by embarrassed free-traders such as Larry Kudlow, it sure doesn’t seem that Trump is simply using tariffs to get a good free-trade deal. “There’s growing acceptance that the president really is a protectionist to his core,” Strain observes.
Third, if a recession does hit, we are in a terrible position to cushion the blow. Economist Jared Bernstein explains, “The most important thing you need an administration and Congress to do in a downturn is to quickly offset the demand contraction with fiscal stimulus. That means strengthening the safety net, which Trump has consistently tried to weaken. It means state fiscal relief including to big, blue states.” He continues, “It means infrastructure, something they’ve never been able to pull off. And don’t forget: We’ll be entering the next recession with a debt-to-GDP ratio that’s twice the historical average (80 vs. 40 percent).” As to the latter, we are already looking at a deficit soon to hit $1 trillion; there’s only so much debt we can take on without driving up rates.
The other tool to soften a recession is monetary policy. Once again, however, Trump has depleted our stock of tools to prop up the economy. Thanks to badgering from Trump, the Federal Reserve just cut interest rates (although Trump whined it wasn’t enough) at a time unemployment is at 3.7 percent and interest rates are already historically low. When we really need that economic juice in a year or two, the Fed won’t have that much room to maneuver.
In sum, Trump claimed the economy he inherited as his own. He rationalized tax cuts on the notion he’d boost growth above 3 percent; now we’re on recession watch. He told us a trade war would be quick and good for the economy; it’s now stymieing business investment decisions. So yes, if a recession hits, Trump will richly deserve blame.