Last week, the rumor mill was alive again with chatter about “tax cuts 2.0”.
With the US economy decelerating, the Trump administration is keen to avoid a downturn in an election year and so, Larry Kudlow is reportedly working with GOP lawmakers (or something like that) on a package of economic measures to bolster growth.
You’d be forgiven for being skeptical about tax cuts “2.0”. After all, tax cuts “1.0” have contributed to a $984 billion deficit, and contrary to promises made by Kudlow (and Trump), supply-side gimmickry has not produced blockbuster economic growth.
Read more: It’s Too Late. Trump Can’t Save Trumponomics. And Neither Can Larry Kudlow.
Yes, the economy has done well under Trump. But, no, there has been no renaissance. Here we are headed into 2020 and just as analyst after analyst suggested, growth has slowed as the fiscal sugar high waned.
The economy grew at the second-slowest clip in 15 quarters in Q3 and remember, the 1.9% headline print on the advance read was actually a big beat to consensus. In other words, 1.9% is what “better-than-expected” looks like these days.
Similarly, the October jobs report was described by Kudlow and Trump as a “blowout”. That’s true and false at the same time. It was indeed an impressive beat, especially considering the circumstances, and the revisions to September and August were large, but when 128k is a “blockbuster”, you know you’ve got a problem. (The average in the current expansion is roughly 200k).
Meanwhile, the manufacturing sector is mired in a downturn thanks in no small part to blowback from the trade war. That’s something else analysts have been warning about for the better part of a year. In addition to payrolls, Friday brought another sub-50 ISM manufacturing print. As with the jobs report, the number was better than feared, but adjectives like “good” are now relative terms.
This week brings University of Michigan sentiment and October ISM non-manufacturing. Remember, the services sector started to catch down to manufacturing in September, and the market will be keen to see whether that trend continued last month.
Recall that BofA’s David Woo uses three simple measures for a “presidential score sheet” aimed at assessing reelection odds. Those three measures are: Consumer confidence, unemployment and ISM manufacturing.
“It turns out that when a president is reelected, at least two of the three indicators are showing improvement”, Woo wrote in August, concluding that “these results show economic success is paramount to the chances for reelection”.
(BofA)
We talked about that simple visual at length two months ago, and have brought it up at regular intervals since. Here’s what the picture looks like now, headed into this week’s key data releases:
In short, things have improved since August, when last the administration was scrambling to come up with a way to put a floor under the economy.
And yet, it’s hard to know how much of that improvement is down to monetary policy easing starting to work its way through and trade optimism. Last week, Jerome Powell made it clear that the Fed intends to pause on the rate cuts and although he went out of his way to drive home the notion that the committee won’t consider hikes unless inflation accelerates materially, he also cited the improving trade outlook in the course of explaining the characterization of policy as being “in a good place”.
Trump isn’t satisfied that the Fed has done enough, which means it’s at least possible that he’ll feel compelled to engineer another trade scare in order to make the December meeting “live” again.
To the extent the improving outlook since August has been a function of a “just right” mix of easing trade tensions and a Fed that was still accommodative, it’s possible that one of those pillars has to give going forward – either the Fed is on hold and the trade situation keeps improving, or the trade situation deteriorates and the Fed throws in the towel on the whole “mid-cycle adjustment” theme in the course of moving ahead with a fourth cut (and beyond).
“Given the strong October labor report and upward revisions to past releases, solid Q3 GDP and the intent of the Fed to stay on hold, we now expect the funds rate target to remain unchanged through the end of next year”, Barclays said over the weekend, in what looks like a tweak to their Fed call made after the jobs report (on Wednesday evening, following the FOMC, the bank was still calling for another cut). “For now, the USD keeps trading with a softening bias, as stable US data amid low US rates supports risk sentiment and global growth, bringing about a constructive goldilocks state for EM and growth-sensitive FX” versus the greenback, the bank goes on to say.
If you ask Barclays, ISM non-manufacturing will rebound to 53.2 from 52.6 “as sentiment could reflect easing of trade tensions and global risks”. As far as consumer sentiment goes, the bank expects an unchanged print.
They’ll be no shortage of Fed speakers in the week ahead. On deck are Daly, Kaplan, Kashkari, Evans, Williams and Harker.
As the impeachment inquiry plows ahead and enters a new, public phase, it will become even more critical for Trump to keep the economic narrative from deteriorating.
“The election is Trump’s to lose”, Mark Zandi says, citing a Moody’s Analytics model (that incorporates personal finances, equities, the labor market and other inputs) which shows Trump securing 332 electoral votes, more than 2016.
“Trump wins if the economy and his approval rating are about the same a year from now as today, and turnout is typical”, Zandi adds. “But if the economy stumbles, his popularity flags or Democrat turnout is big, the Democrats win”.
“Led by Zandi, the work of Moody’s economists has accurately predicted each election outcome for two decades with the exception of Trump’s 2016 victory”, Bloomberg boasts, on Moody’s behalf.
In other words, they’re 100% on predictable elections and 0% on unpredictable ones.
Congrats!
