Trump’s Economy Had a Good Year, Even If He Didn’t

(Bloomberg Opinion) -- From a political standpoint, 2019 will be remembered as the year President Donald Trump got impeached. From an economic standpoint, however, the year has turned out about as well as he could have hoped for.

After being effectively flat since the middle of 2018, the stock market has risen to record highs over the last several months. That performance is supported by several improvements in economic fundamentals that will be pivotal for Trump’s re-election.

The most important development is one that didn’t happen. Despite warning signs that it might slip into recession, the U.S. economy has avoided declining growth for the year. Most of that is due to the strength of the U.S. consumer, but the role of the housing market cannot be discounted.

Housing starts began rising in July, and homebuilder sentiment reached its highest level since 1999 in December. Housing is typically the biggest driver of the business cycle, so continued improvement would greatly reduce the odds of a recession in the first half of 2020. That’s the most critical time for the president’s re-election chances.

This housing upturn is in part due to the response of the Federal Reserve. Aggressive interest rate hikes in late 2018 led to an inverted yield curve — when short-term interest rates, which are largely under the control of the Fed, rise higher than long-term interest rates, which are more closely tied to economic fundamentals. Historically, an inverted yield curve is one of the most reliable signs of an imminent recession.

Often, however, that is because the Fed is slow to respond to worsening conditions. In particular, it has traditionally been reluctant to cut interest rates until the job market weakens significantly. But in 2019 the Fed took the unusual step of cutting interest rates three times while unemployment was still falling and job gains were relatively steady.

Besides housing, the other big driver of the economy is business investment. This is a particularly important metric for Trump, because businesses are large purchasers of the type of high-value manufactured goods that are still made in the U.S. Restoring manufacturing was one of the president’s core campaign promises.

Here the news for the president is not as encouraging. His trade wars have increased uncertainty, leading to lower business investment and a mini-recession in manufacturing. That recession was particularly hard on the job markets in Wisconsin, Michigan and Pennsylvania, three states that carried Trump to victory in 2016.

A turnaround of this manufacturing decline remains unlikely — but if it were to happen, it would require just the combination of developments that appear to be coming together right now.

The new trade agreement with Mexico and Canada is done. The differences between it and NAFTA aren’t large enough to have a major economic impact, but businesses will appreciate the decline in uncertainty. At the same time, Trump seems to have reached a truce in the trade war with China. And the decisive victory last week by Boris Johnson’s Conservative Party means that uncertainty over Brexit will not be as much a drag on the U.K. and world economy.

None of these trade-related developments would by itself make much of a difference to the U.S. economy. But that fact that they are all occurring almost simultaneously is likely to magnify their impact.

Trump’s re-election is far from certain, of course. He is historically unpopular for a president with an economy this strong, and risks remain for manufacturing in swing states. Nonetheless, his chances are better at the end of this year than they were at the beginning.

To contact the editor responsible for this story: Michael Newman at mnewman43@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Karl W. Smith, a former assistant professor of economics at the University of North Carolina and founder of the blog Modeled Behavior, is vice president for federal policy at the Tax Foundation.

©2019 Bloomberg L.P.