Donald Trump’s 2020 economic vulnerability

James Carville famously remarked that when it came to winning presidential elections what mattered was “the economy, stupid.” If that maxim holds true in 2020, Donald Trump will find that a major impediment to his reelection bid will be his having fallen short on his many economic promises.

A key economic promise President Trump made in 2016 was to put the country on a higher economic growth path. By deregulating the economy and by enacting a major tax cut, he promised that we would have a major investment boom. That in turn would allow the U.S. economy to grow on a sustainable basis by 3 to 4 percent a year or at a very much faster rate than it did during the Obama years.

To date, the reality has fallen well short of the hype. Far from booming, investment growth has been highly disappointing, with most of the corporate tax cut having been used for share buybacks rather than for new productive investment. Meanwhile, after recording a 2.5 percent growth rate in 2018, GDP growth has now decelerated to around 2 percent. That is below the economic growth rate recorded during the Obama years.

Worse yet, the recent inversion of the yield curve would suggest that the U.S. bond market is now strongly signaling that the U.S. could be headed for an economic recession in 2020. That inversion should not be taken lightly considering that the bond market has accurately forecast each of the last six U.S. economic recessions. 

Supporting the bond market’s gloomy economic view is the fact that not only will the tax cut boost that the economy received in 2018 will have faded. Rather the global economic environment will also have become very much more challenging.

As a result of the U.S.-China trade war, China, the world’s second largest economy, is slowing down markedly, while Germany, Europe’s largest economy, is now on the cusp of an economic recession. Meanwhile, in the period immediately ahead, the global economy could be hit by a worsening in U.S.-China trade relations as a result of the Hong Kong crisis, by Boris Johnson’s United Kingdom crashing out of Europe on Oct. 31 without a Brexit deal and by the prospect of renewed political turmoil in an economically troubled Italy.

Over the past two and half years, President Trump has trumpeted the stock market’s buoyancy as a measure of his successful economic management. Yet here too the results are hardly impressive.

Since inauguration day, under Trump’s presidency stock prices have increased by around 25 percent. Most of that gain was recorded in the first year of his presidency after which stock prices have basically flat lined. This performance falls well short of that at this stage in the Regan, Clinton and Obama presidencies, and it could get materially worse if the U.S. economy were to lapse into an economic recession.

Another basic pillar of Trumponomics has been an America First trade policy that was supposed to eliminate the U.S. trade deficit and lead to a weaker U.S. dollar. Once again, the results have been very disappointing.

Far from narrowing, the U.S. trade deficit has increased by some 25 percent under Trump while the dollar has remained at around its highest level over the past decade.

These results hardly have come as a surprise to most mainstream economists, who warned that budget policy irresponsibility would lead the U.S. back to the twin trade and budget deficit problem of the 1980s. It would do so by eroding the country’s saving performance and by keeping the U.S. dollar well bid. 

Judging by the ballooning budget deficit and the accelerating rate of debt accumulation under his watch, Trump will hardly be able to campaign as the prudent guardian of the country’s public finances. According to the Congressional Budget Office, largely as a result of the unfunded Trump tax cut, the U.S. budget deficit will remain in excess of $1 trillion a year for as far as the eye can see. Meanwhile, the public debt is now set to increase to around 100 percent of GDP within the next ten years.

The good news for those challenging Trump in the 2020 election is that the incumbent is all too likely to have an economic Achilles heel. The bad news for them, however, is that if they do win that election, they will be faced with the daunting challenge of rectifying President Trump’s economic legacy. They will also find that the president’s budget largesse during the good economic times will have left them with little room for fiscal policy maneuverability when the economy hits a rough patch. 

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.