President Donald Trump, already in a grumpy post-midterm mood, faces a growing list of economic problems that could irritate him even more next year. Chief among them is a withdrawal from the economy’s sugar high.
Fiscal stimulus from the GOP tax cuts is likely to start running out. The Federal Reserve is expected to keep bumping up interest rates. And few analysts expect a divided Congress — facing soaring deficits and with its eyes on 2020 — to join hands and pass a big infrastructure package or sweeping middle-class tax cuts to keep the fiscal juice flowing.
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The collection of all these factors, coupled with jittery investors already worried about trade wars and a global slowdown, could deny Trump the kind of big economic growth numbers he loves to celebrate. And they could undercut one of the GOP’s biggest current arguments: You may not love what Trump says or does, but the Trump economy is awesome.
“The first punch will be the lag effect of rising interest rates. Rates work slowly, but they do work eventually,” said Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics. “And the second will be that by 2020, without a further package from Congress, the stimulus will be done. You put all these together and it’s a little like Wile E. Coyote running over the cliff. You look down, and the ground you thought was under you suddenly isn’t there anymore.”
The White House is well aware of the risks. Senior administration officials believe the big corporate tax cut will unleash a wave of sustainable growth in business spending that will keep the good numbers rolling — from job gains to higher wages — and keep producing GDP reports in the 3 percent territory that Trump loves, rather than the 2s or 1s that many economists expect.
But a prolonged business spending boom is no certainty, and some signals — including the third-quarter GDP report — suggest that capital investment is already slowing. So the White House is deeply engaged in efforts to boost growth through executive action, especially in the energy sector, by speeding the permitting process for natural gas pipelines and boosting the American shipping industry.
White House officials are not counting on a big infrastructure package or a deal on the kind of middle-class tax cut Trump promised at the end of the campaign.
“We’ve been noodling more on this middle-class tax cut, how to structure it, and even pay for it,” National Economic Council Director Larry Kudlow said in a recent interview in his West Wing office. “I don’t think the chances of that are very high, because the Democrats are going to go after the corporate tax and all that stuff.”
Kudlow also was not enthusiastic about agreement between the White House and Democrats, who will control the House of Representatives, on a deal in 2019 to spend significant federal money on infrastructure projects. “Anybody that thinks, you know, like this trillion-dollar [infrastructure spending] number, which is over 10 years — we don’t have that,” Kudlow said.
Kudlow said he still believed a “boom” in capital spending will continue in 2019 and 2020 and that he didn’t worry about numbers like the recent GDP report showing capital spending nearly stalling out at 0.8 percent growth in the third quarter.
But while Trump’s advisers remain bullish, many economists are now trimming their estimates for U.S. growth next year in part because of a reduction in the impact of the tax cuts and spending increases — more than $2 trillion worth — approved by Congress and signed by the president last year.
“I expect fiscal policy will still be stimulative in 2019, but not as stimulative as in 2018,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics. “In round numbers, fiscal stimulus is adding maybe three-quarters of a point to GDP growth in 2018, will add maybe half as much again in 2019 and be close to neutral in 2020.”
Deutsche Bank estimates that fiscal policy will remain mildly positive in 2019 but turn into a drag of about 0.3 percent on the economy by 2020. “You should expect GDP growth to slow as we get into the second half of 2019 and in particular in 2020,” said Torsten Slok, Deutsche’s chief international economist.
The decline in fiscal stimulus will come as the Fed, much to Trump’s displeasure, is likely to keep raising interest rates in 2019. The Fed is expected to hike rates again next month and several more times next year.
The central bank’s main goal is to slow economic growth enough to prevent a surge in inflation as the labor market gets tighter. The Fed could pause its interest-rate hikes if the decline in fiscal stimulus from Congress kills economic growth entirely. But by the time it does so, the unemployment rate could be rising again.
“I’d be quite surprised if unemployment is still falling by 2020, so Trump is very likely to be running against a backdrop of rising unemployment,” said Shepherdson. He added that it is unlikely that the Fed could “magically manage to stabilize everything and freeze it where it is now and make everyone happy forever more.”
Ordinarily in such a scenario, Congress might step in and take stimulative measures to ensure that any slowdown is short-lived through higher spending and tax reductions. But a combination of political and fiscal factors makes this difficult, if not impossible.
On the political side, Democrats have limited incentive to cut a deal with Trump on an infrastructure spending package. And Republicans in Congress are growing increasingly alarmed by the ballooning size of the federal budget deficit, which hit $779 billion in 2018 and is expected to top $1 trillion in 2019. So when the Fed is tightening, Congress may be unable to push the other way.
“We poured a bunch of stimulus into the economy at precisely the time it didn’t need it, and we are going to have to pay the price for that in the coming years,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “When the economy turns down, and by all accounts it will, we are likely to need to continue further stimulus. But because we are at such a higher debt position relative to normal, it’s going to be harder to borrow and do that.”
Senate Majority Leader Mitch McConnell (R-Ky.) on Wednesday flatly rejected the idea of doing a big infrastructure deal with Democrats. “Republicans are not interested in a $900 billion stimulus,” he told reporters.
Instead of debates about further stimulus, Congress could wind up stuck in bitter fights over funding the government and raising the debt limit. That could start next month if Trump demands more funding for his border wall as a part of a year-end bill to avoid a partial government shutdown on Dec. 8. The debt limit goes back into force in March, though Congress will likely have until summer to raise it before flirting with default.
Concern over waning stimulus and rising rates has some of Trump’s advisers, including Kudlow, scrambling to avoid a round of auto tariffs on Europe and a trade war with China next year. Those concerns helped turn October into the worst month for the stock market since 2011.
All the potential economic headwinds have Kudlow and other White House advisers banking hard on the idea that businesses will plow their tax-cut money into new spending in 2019 and beyond. “This economic boom is great. I personally believe it’s going to continue for quite some time,” Kudlow said. “If we don’t get the capital expenditures, I’ll be wrong. But I think we will.”