Stock correction comes at bad time for Trump, GOP

A massive drop in stock markets this week is raising concerns that the market is headed for a large correction — and may also put a dent in the economic message in the closing weeks of the midterm campaign by President Trump and Republicans.

The Dow Jones Industrial Average wiped out the entirety of its 2018 gains this week, while the S&P 500 dipped into correction territory, falling 10 percent below its September peak.

Economists warn that the falling stock market may not simply bounce back, as it has several times this year. The market, they say tends to be an early predictor of economic performance, and may presage worse economic news around the corner.

{mosads}Statistics released by the government on Friday showed the economy growing at a healthy 3.5 percent rate in the third quarter. That was down, however, from 4.2 percent in the second quarter.

“The stocks market’s angst reflects the reasonable concern that the economy is going to slow moving forward,” said Mark Zandi, chief economist at Moody’s Analytics. “The economy is growing strongly, but growth has peaked and that’s evident in today’s GDP [gross domestic product] number.”

Republicans had hoped the economy would help them this fall, and candidates across the country are continuing to try to use it to bolster their cases for reelection.

“Right after the administration was elected, the stock market went roaring straight up through the roof,” Rep. Dave Brat (R-Va.) said at a debate against Democratic challenger Abigail Spanberger earlier this month.

The two are locked in a toss-up race for a district that has been in GOP hands for decades, underscoring the difficult environment for many Republican House candidates this fall.

Brat argued that handing the House majority back to Democrats would end the good economic times.

“It’s no time to turn back to the failed Obama era and economy,” he said at the debate.

The falling markets could weaken that kind of argument going forward, in part because with the latest losses, markets under Trump have not risen at the pace of markets under Obama.

The Dow Jones rose 41 percent between Obama’s inauguration and the two-week period leading up to his first midterm. Since Trump’s inauguration it has risen 25 percent.

Since the downturn, Trump has been mum on the markets, a shift from his complaints on Twitter last week that the media was not paying enough attention to the stock market.

Third-quarter GDP growth was powered primarily by consumer spending and retail inventories, which typically reflect short-term confidence in the economy. Business investment and capital expansion fell over the past three months, warning signs that the Trump boom could be past its prime.

“It is an actual sugar rush. This is what it looks like when you have a sudden surge of income into households,” said Daniel Alpert, managing partner of investment firm Westwood Capital.

“The economy is overhyped.”

The GOP’s tax-cut law had an undeniable effect on the markets and the economy, goosing stocks up in 2017 as traders anticipated the tax cuts, and then helping to drive the 4.2 percent growth earlier this year.

The law has not been politically popular, however, judging from polls.

An NPR/PBS NewsHour/Marist poll released Friday found that the law made people more likely to vote for Democrats by a margin of 45 percent to 39 percent.

While scores of companies announced raises and staff expansion plans in the wake of the tax-cut law, there’s little sign of rising investment in training, equipment and facilities that boost economic productivity, Zandi said. Instead, he said, most of the tax-cut fiscal stimulus has come through rising consumer spending and other unsustainable short-term boons.

Zandi said that the benefits of lower corporate tax rates were likely cancelled out by rising interest rates spurred in part by the $1.5-trillion tax cut.

“If you borrow money to pay for the tax cuts, it raises interest rates and it raises the cost of capital,” Zandi said, calling the bill “a very costly way to go nowhere.”

Trump in recent weeks has criticized the Federal Reserve for interest hikes, calling it “loco” and “too aggressive.”

Democrats have put GOP calls for cutting back entitlements at the center of their economic messaging.

“Republicans blew a $2 trillion dollar hole in the federal deficit to fund a tax cut for the rich. To now suggest cutting earned middle-class programs like Medicare, Social Security, and Medicaid as the only fiscally responsible solution to solve the debt problem is nothing short of gaslighting,” Senate Minority Leader Charles Schumer (D-N.Y.) said earlier this month.

The NPR poll found that 60 percent of respondents would rather roll back the tax cuts as a means of lowering the deficit than cut spending and entitlement programs such as Medicare, Medicaid and Social Security.

Despite those problems, Republicans are better positioned than Democrats were in 2010 when it comes to the economy. In that midterm, Democrats lost their House majority and more than 60 seats.

Unemployment dropped from 4.8 percent when Trump took office to 3.7 percent in September. Under Obama, who came into office as the Great Recession was still working its way through the economy, the rate rose from 7.8 percent to 9.5 percent in the equivalent time period before dropping to a low of 4.6 percent in late 2016.

In terms of growth, the economy is also doing relatively better.

Under Trump, quarterly growth has averaged 2.8. When Obama faced his first midterms, average growth had stalled out at 1.3 percent, dragged down by the last two quarters of negative growth from the recession.

Still, voters are generally more concerned with how they personally feel about the economy, rather than what newspaper headlines report about it.

Consumer sentiment in 2018 is higher than any year since 2000, according to the University of Michigan survey that tracks consumers’ views on the economy. Household debt has also steadily increased throughout Trump’s term, a sign that consumers feel comfortable in their ability to pay down long-term expenses.

Even so, lagging wage growth and labor productivity could cut short the rush of spending and confidence if consumers are unable to keep up with rising interest rates and prices.

“You look at those numbers and you wonder what remains of household spending power. They’re not going to continue to go into debt,” Alpert said. “Maybe it has a little bit more room to grow, but it’s no healthy because all of this is not engendered by real wage growth.”