The Greatest Threat to Trump's Re-election

October 7, 2019

4 minute read

RECESSION FEARS ON THE RISE: Yesterday’s terrible manufacturing data confirmed that two sectors of the U.S. economy are now in recession — manufacturing and agriculture. These two sectors are crucial to Donald Trump’s re-election prospects, so he furiously increased his criticism of the Federal Reserve.

WE STILL DON’T THINK A RECESSION IS IMMINENT: Mediocre growth is the safest bet, thanks to solid consumer spending and enormous fiscal and monetary stimulus from Washington. But a perfect storm of negatives looms: the ongoing GM strike, continued trade uncertainty, higher energy prices, and the threat of a European recession as a messy Brexit becomes more likely. Anxiety over the economy, fueled by the media’s fixation on recession, is a huge threat to Trump.

A FED RATE CUT at the Oct. 29-30 FOMC meeting looks increasingly likely; tomorrow’s jobs report will be crucial. But even if the Fed cuts rates later this month and again on Dec. 11, the uncertainty over trade will persist; a China deal looks unlikely any time soon, and a new trade war could erupt soon between the U.S. and the EU (meanwhile, ratifying a NAFTA replacement before the Oct. 21 Canadian election looks increasingly unlikely).

EVERYWHERE WE LOOK, WE SEE THREATS TO TRUMP’S RE-ELECTION: Impeachment in the House by Christmas looks increasingly likely. The do-nothing Congress, on still another long vacation, is unlikely to pass much — no gun reform, no drug pricing bill, with a huge budget fight late this year. And Trump’s job approval rating in some polls this week has fallen below the crucial 40% level — a huge warning signal for any incumbent.

THE SENATE IS UNLIKELY TO CONVICT TRUMP, so it’s the economy that poses the greatest risk to him. The medicine cabinet is empty — a major new tax cut will face strong opposition in the House, intervention to weaken the dollar is unlikely to succeed, an infrastructure spending program is going nowhere, and Fed rate cuts are likely to be deliberate, not dramatic.

YESTERDAY’S MANUFACTURING DATA changed our thinking; the risk that weakness will spread throughout the economy has increased. This couldn’t come at a worse time for Trump, who has virtually no chance of achieving his goal of 3% economic growth next year. The GDP growth path now feels like something less than 2%, and that’s nothing he can brag about ahead of the election.

THE OBVIOUS OPTION FOR TRUMP is to get a China trade deal — any deal — that reduces the uncertainty. Trump knows this and probably will take what he can get by late winter. The great wild card is whether Chinese leaders may decide to wait on a deal until after the U.S. election, hoping that Trump loses — a prospect that has increased significantly in the past month.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

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