PREVIOUSLY OBSCURE to all but market mavens, the relationship between interest rates on long-term government debt instruments and short-term ones took center stage in American life last week. Bond markets experienced an “inverted” yield curve, in which short-term debt pays higher interest than long-term. This has historically been a warning sign of recession, because it suggests investors have lost confidence in the economy’s future and seek to park their money in low-yielding, but safe, government debt until the storm passes. Put the yield-curve inversion together with a quarter of negative growth in Germany and a 17-year-low in quarterly industrial output in China, and suddenly it seemed that President Trump might have to explain away an economic downturn in 2020 rather than take credit for prosperity.
Maybe. Optimists could easily point to more encouraging indicators, such as a robust U.S. consumer spending report, strong household balance sheets and a respectable 2.3 percent improvement in labor productivity during the second quarter. Such upbeat data help explain why the stock market recovered most of its losses for the week by Friday, and why it would be political folly for Mr. Trump’s opponents to anticipate that a recession will arrive to harm his reelection prospects. Needless to say, the harm it would do to ordinary people is a reason to hope there won’t be a recession, whatever its political impact.
What is fair and reasonable is to note that economic turbulence is real; that Mr. Trump’s policies, and the erratic manner in which he implements them, have contributed to it; and that — to an astounding degree — he seems incapable of a midcourse correction even though his political future depends on it.
The U.S. and global economies have long since absorbed the benefits of the tax cuts Mr. Trump and his fellow Republicans delivered at the end of 2017. What remains in the U.S. arsenal to fight a recession, should it come, is not much: The Federal Reserve is cutting its (already low) interest rates, and the budget deficit is already a trillion dollars. Another thing markets have absorbed is the lesson that the president does not have a strategic objective for his trade fight with China other than to perpetuate it, his recent delay in consumer-goods tariffs notwithstanding. Nor does he seem concerned by instability brewing in Europe because of Brexit — except to encourage it. It is sinking in on businesses that Mr. Trump’s trade war, Brexit and other threats to the global economy may be here to stay at least through 2020. Long-standing assumptions about supply chains, currency values and capital flows upon which companies base their decisions have been upended.
Mr. Trump has delivered a shock to the global economic system, and until investors can figure out the repercussions, they will be that much less likely to invest and create jobs. Perhaps that system was due for a shake-up, especially to the extent China was abusing it. But Mr. Trump could have delivered necessary change less disruptively if he had taken on China in concert with European, Asian and North American allies rather than antagonizing them all at once, as he has done. What the world needs now is what all U.S. presidents since World War II have offered: stabilizing leadership. Alas, that is one thing Mr. Trump is fundamentally unsuited to provide.