U.S. recession looks less likely in 2020, boosting Trump's chances of re-election

A noticeable shift has taken place on Wall Street and among many economists and business leaders in recent weeks: Fears of an imminent recession have faded and been replaced with cautious optimism, especially about 2020, a trend that bodes well for President Donald Trump as he seeks re-election.

The International Monetary Fund is a good example. It made headlines last week when it slashed its global growth forecast to the lowest pace since the financial crisis. But it is not as gloomy as it sounds. The IMF also predicted a rebound for later this year and slightly stronger growth next year for the world economy, which should be a positive for the United States.

The IMF isn't alone in its optimism. The U.S. stock market had one of its best starts to the year since 1998 and is now within striking distance of hitting an all-time high. Goldman Sachs says the likelihood a recession in the next year has been cut in half, to 10 percent.

There's a plausible story to tell that explains why this optimism has taken root. It goes like this: A U.S.-China trade agreement looks likely; the Chinese economy appears to be stabilizing; and the Federal Reserve (and other central banks) have shown they will do whatever it takes to keep this expansion going.

Many of the major fears that drove the stock market down at the end of last year and caused anxiety about a U.S. and global recession by 2020 have subsided. Instead of a recession, some are now talking about an "upside surprise" in which the U.S. economy could grow faster than expected, especially if businesses start to spend more as Trump's trade war cools and the Fed doesn't raise interest rates.

Almost no independent expert thinks the economy will achieve above 3 percent growth in 2019 and 2020 as the White House predicts. But most forecasters are now in the 2 to 2.5 percent range for 2019 and about 2 percent for 2020, good enough to keep unemployment low and wages rising at a robust pace.

How the economy fares in spring 2020 is likely to play a large role in Trump's re-election chances, according to election experts like Larry Sabato of the Center for Politics at the University of Virginia. The best guess now is that the economy in early to mid-2020 won't be the "huge" growth Trump likes to boast about, but there's a decent chance it will be doing well enough to give him an edge.

"If unemployment is still 3.5 to 4 percent and gas is still $2.75 and the stock market is still near a record high, then the economy is probably at the president's back, or at least not a headwind," said Mark Zandi, chief economist at Moody's Analytics. "If you plug that scenario into our election model, Trump wins or it's close."

U.S. companies continue to hire at a robust pace and wages are rising, including for lower-skilled workers, which should make Americans comfortable enough to keep spending. The housing market is showing signs of a rebound, another indication that people are still confident about the economy and their finances.

China, a nation Trump often berates, is providing a boost to the global and U.S. economies by stimulating its own. The world's second-largest economy said Wednesday that growth was 6.4 percent in the first quarter, slightly better than expected and a sign that China has stabilized despite the trade war.

But not all is well. The U.S. manufacturing sector has had a noticeable slowdown this year, and business and consumer sentiment, while still high by historical levels, is down from where it was a few months ago.

Trump has repeatedly blamed the Fed, especially Chairman Jerome Powell, for dragging the economy down by raising interest rates too quickly last year (the Fed raised interest rates a full percentage point). But economists, investors and business leaders no longer see the Fed as a worry after Powell indicated that the central bank is "on hold" and unlikely to raise rates again this year.

Trump has yet to remove any tariffs he has put in place. Even the steel and aluminum tariffs on Canada and Mexico, which he said were a bargaining tactic, did not change after the revised North American Free Trade Agreement (NAFTA) was finished last fall.

"All of the optimism about the economy assumes the U.S.-China trade conflict is rolled back, and Mr. Trump doesn't start imposing auto tariffs on the EU and Asia," said Joseph Brusuelas, chief economist at accounting firm RSM.

Heather Long is an economics correspondent for The Washington Post.

 

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