Business
Trump's economy faces new threats ahead of midterms
By Sylvan Lane,The Hill, 06/01/18
Jun 3, 2018 - 11:32:58 AM

President Trump has presided over a strong U.S. economy during his first term, maintaining low unemployment and solid growth ahead of the November elections.

Republicans hope the positive trends will carry them to victory in the midterm campaign, but growing trade tensions and tightening financial conditions could slow the expansion.

Economists see U.S. growth nearing the White House's target of 3 percent, in part because of the $1.5 trillion tax-cut law that Republicans passed in December.

While the fiscal boost from the tax law could power growth through the midterm elections, Trump’s tariffs on U.S. allies loom darkly over the future.

The tariffs on Canada and Mexico have complicated negotiations on updating the North American Free Trade Agreement (NAFTA), raising the possibility that Trump could exit the deal altogether — an outcome that could prove hugely disruptive for U.S companies.

With interest rates rising across the board, it remains to be seen whether businesses will follow through on their planned investments and expansions.

“There are a lot of fissures out there, and some of them are starting to blow, but they’re not at the point where we’re seeing an eruption," said Mark Zandi, chief economist at Moody's Analytics.

Still, he warned, “volcanoes can blow when you least expect.”

Topline economic numbers during Trump’s first 18 months in office have remained robust, with unemployment below 4 percent and growth by GDP nearing 3 percent. The president inherited years of sustained job gains and growth from former President Obama, whom Democrats credit with the current state of the economy.

Trump and Republicans are counting on the strong economy and the tax-cut law to boost them at the ballot box as they seek to defend the House majority and pick up seats in the Senate.

The economy should give the GOP a boost heading into November, but analysts warn there are several landmines Trump could trip before the election.

“There’s a lot of stuff happening underneath the topline numbers that’s troubling to me,” said Steve Bell, a former Republican staff director for the Senate Budget Committee.

“What Trump has done — it may not show up for a while — he’s probably begun the end of this economic recovery,” Bell said.

Economists see Trump’s imposition of steel and aluminum tariffs on imports from key allies as the biggest threat to economic growth.

Trump on Thursday imposed levies on imports from Canada, Mexico and the European Union, citing national security concerns.

Canadian, Mexican and European leaders condemned Trump’s decision and pledged to impose their own tariffs on U.S. exports, raising the prospect of a full-fledged trade war.

Zandi said the tariffs and retaliation could cost the U.S. economy roughly 250,000 jobs.

Republican lawmakers have blasted the tariffs, calling them a tax on U.S. consumers and an affront to key economic and military partners. Economists expect prices on consumer goods to spike in response to the policy moves.

“When you impose tariffs, what you are doing is increasing prices for the folks at home and therefore lessening their purchasing power,” Bell said.

There’s also widespread fear among business leaders and free trade advocates in Congress that Trump’s new tariffs could spoil efforts to renegotiate NAFTA.

Both Trump and Canadian Prime Minister Justin Trudeau said Thursday they’d rather walk away from the trade pact than agree to a lesser update.

The Trump administration wants the new pact to be subject to reapproval every five years, which is a nonstarter for Canada and Mexico.

“No one is going to accept that,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics and a contributor to The Hill.

“You can’t plan on the basis that every five years you’re going to have to go back and renegotiate something,” Shepherdson said. “How the hell are businesses supposed to plan around that?”

GOP lawmakers have warned Trump that his trade policies could negate the economic boost of the 2017 tax cuts, the prime accomplishment for Republicans under his watch.

Republicans pitched the tax cuts as a crucial boost to U.S businesses that would spur economic growth and give working Americans thousands of dollars in additional take-home pay.

While the tax package is expected to boost U.S. growth in 2018, economists are still searching for proof that businesses have invested their savings in expansion.

Zandi said the tax cuts haven’t made a “meaningful impact yet on consumer spending or business investment.”

“If we don’t see it in the next month or two, we have to question the stimulus we’re getting,” he said.

The tax cuts are also expected to add billions of dollars to federal deficits as interest rates rise across the board. Consumer and corporate debt have also spiked under years of loose financial markets, while wage growth has remained flat.

“Debt service is now becoming a bit more of a burden on households,” said Dan Alpert, managing partner of the investment firm Westwood Capital. “I am very concerned that we’re about 18 months away from a meaningful slowdown, and you have to ask yourself whether the economy is set up to deal with that.”