Slowing economy looms as 2020 challenge for GOP

There are growing signs that the economy will slow substantially over the next two years, posing a significant problem for President Trump and Republicans who highlighted economic growth heading into the 2018 midterm elections.

Goldman Sachs on Monday issued a report projecting gross domestic product (GDP) growth will slow to 1.8 percent and 1.6 percent in the third and fourth quarters of 2019, respectively, sooner than anticipated and creating a major headwind for GOP candidates the following year.

The bank’s chief economist, Jan Hatzius, wrote in a note to clients that “tighter financial conditions and a fading fiscal stimulus” from the 2017 tax reform and spending packages will be “key drivers of the deceleration.”

{mosads}The Goldman Sachs forecast is in line with a Congressional Budget Office (CBO) projection from August that called for GDP growth to slow to 2.4 percent next year and then 1.6 percent in 2020.

That’s a dramatic slowdown compared to the 4.2 percent rate from the second quarter of this year and subsequent 3.5 percent pace for July through September.

Trump campaigned heavily on those robust numbers in the months before the Nov. 6 midterms.

He mocked former President Obama in September for saying during the 2016 presidential race that Trump would need a “magic wand” to get to 4 percent GDP growth.

“I guess I have a magic wand, 4.2%, and we will do MUCH better than this! We have just begun,” Trump tweeted in August after GDP growth was revised up to 4.2 percent.

That same month he predicted GDP could “be very shortly in the fives.”

Falling well short of those predictions over the next two years would spell trouble for Republicans in the 2020 elections.

{mossecondads}“Anytime you have a slowing economy or entering a recession, that’s terrible news for the party in power, that’s just historically true,” said John Weaver, a Republican strategist who worked on Ohio Gov. John Kasich’s (R) 2016 presidential campaign.

Weaver said the economic numbers are especially important to Trump, who cites them frequently and with great exuberance.

“Sixty-five percent of the American people are now happy with the economy but 65 percent of the American people are unhappy with the direction of the country. Slow the economy down, you can imagine where their viewpoints will go,” Weaver added. “It will be impossible for the president to run on a hyped-up economy when it looks like we may be entering a recessionary period.”

The souring economic figures are also a problem for GOP congressional candidates, many of whom have hitched themselves to Trump’s wagon.

Economists say the president’s trade and immigration policies and the threat of rising interest rates, fueled by the mounting federal debt, are undercutting the fiscal impact of the 2017 tax cuts championed by Republicans.

Reenergizing the economy could depend on reversing course in those two areas, according to economists.

“The real policy question is: Can the Trump administration, along with the Congress in 2019, focus on pro-productivity activities, which do not include trade wars and certainly don’t include restricting legal immigration, where we get people who are highly productive?” said Douglas Holtz-Eakin, a previous director of the CBO and former chief economist of the the President’s Council of Economic Advisers during the George W. Bush administration.

“I’m not too surprised by Goldman ending up where they did,” he added.

Another option is to try to pass an additional round of fiscal stimulus, such as an infrastructure package or middle-class tax cuts, two ideas that could win support from congressional Democrats.

But Holtz-Eakin said that adding more to the deficit with an infrastructure bill or through additional tax cuts could wind up putting more drag on the economy by boosting the deficit.

“You can’t continually do that. You run up a lot of debt in the process, and we already have too much,” he said.

Monday’s gloomy projection, combined with a report that confidence among homebuilders had dropped to its lowest level since August of 2016, coincided with a 396-point drop in the Dow Jones Industrial Average.

The stock market is close to flat on the year.

If an economic slowdown comes to fruition, the 2017 tax-cut law, which is projected to cost $1.9 trillion, may be viewed as more of a burden than a blessing for Republican candidates.

“The tax cuts will not even come close to paying for themselves. That’s already clearly obvious,” said Mark Zandi, the chief economist for Moody’s Analytics. 

Republicans last year predicted the tax package would pay for itself, arguing that it only needed to increase economic growth by 0.4 percent, a hurdle they said would be easy to clear.

Holtz-Eakin said it’s too soon to conclude the tax cuts won’t pay for themselves.

While he conceded that the initial wave of fiscal stimulus produced by the 2017 law is beginning to fade, he argued that increases in productivity from reforming the tax code and giving companies more incentive to base operations in the United States have yet to fully materialize.

“The fundamental test of whether Goldman and these guys are right in their forecasts is whether those [tax-reform] provisions, combined with the deregulation, will in fact improve productivity growth in the U.S.,” he said. “If they do, we can grow more rapidly than the 1.8 percent [projection] that most people get.”

But the upward pressure on interest rates created by the deficit and Federal Reserve Chairman Jerome Powell’s commitment to “normalizing” Fed monetary policy is shaping up to be another significant fiscal headwind.

The deficit increased by 17 percent in fiscal 2018 and is projected to top $1 trillion in 2019.

“We’ve already seen the peak in economic growth and the deficit is rapidly ballooning,” Zandi said. “Unless policymakers reverse course, the fiscal situation is going to continue to erode and the deficits will be over a trillion this year and as far as the eye can see.”

Bill Hoagland, senior vice president at the Bipartisan Policy Center and a longtime Senate Republican budget expert, said Goldman Sachs’s projection of an economic slowdown is credible.

“I’m not surprised with those projections because it was pretty well projected that there would be this stimulus in the early part of 2018 from the tax bill but that it would phase out,” he said, citing the CBO’s report from August. “We’re on a path down.”

“It does seem to me the real problem is productivity,” he said, attributing that decline to a lack of investment by companies and the federal government in workforce training.

Hoagland said it looks as though much of the tax cuts have “gone back to the stockholder or the investor in terms of their capital gains, as opposed to the companies investing in their workers for long-term growth.”