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Trump’s growing economy faces fall obstacles

An ebullient President Trump on Wednesday touted the U.S. economy’s 3 percent growth in the second quarter and boasted that the best is yet to come.

In a speech meant to sell his tax reform plan, Trump said the latest statistics highlight how he’s fulfilling his promise to strengthen the U.S. economy.

“If we achieve sustained 3 percent growth, that means 12 million new jobs and $10 trillion in new economic activity over the next decade,” Trump told a receptive crowd in Springfield, Mo. “And I happen to be one that thinks we can go much higher than 3 percent. There’s no reason why we shouldn’t.”

Whether the economy continues to grow may depend on how Trump and the Congress navigate a series of thorny political issues in the next month that include measures to prevent a government shutdown and raise the nation’s borrowing limit.

Trump predicted during last year’s campaign that if elected president, he would boost growth to 4 percent or higher, an annual rate of expansion not seen since 2000. 

While Trump’s approval ratings have dropped, surveys show Americans generally favor his handling of the economy, underlining the importance of continued growth for his brand.

Mark Zandi, the chief economist at Moody’s Analytics, said even a short shutdown would hurt the economy.

“With a shutdown, if it’s one week, it will subtract a tenth of a percent from GDP in the quarter. If it is two weeks, it will be couple tenths, maybe 25 basis points or a quarter point,” he said.

If the government shuts down for a month, “that will be significant — that will really hurt the economy and cause it to stall out.”

A failure to raise the debt ceiling would be even more serious, as it would prevent the government from making necessary payments, could lower the nation’s bond rating and, in a worst-case scenario, lead to a default.

Prospects for raising the debt ceiling and funding the government have likely improved because of the additional need for Congress to pass legislation to help the victims of Hurricane Harvey.

Packaging all three items into one vehicle makes sense given the need to act fast — both the debt ceiling and government-funding bills face end-of-September deadlines.

While Trump has said the emergency aid is a separate issue, given the few legislative days in the month it seems likely there could be one package — which would be difficult to vote against.

Trump sees tax reform as fueling further economic growth, and said Wednesday that the economy would not grow as strongly without it.

“If we don’t get tax cuts and reform approved, potentially the biggest ever — we’re looking for the biggest ever — jobs and our country cannot take off the way they should,” he said.

Yet there’s pessimism on Wall Street that a tax reform package will become law.

Congress is way behind on its schedule for reforming the tax code, a Herculean task that lawmakers haven’t done in a comprehensive way since 1986. 

Lawmakers have yet to pass a budget or reach consensus on how to pay for reducing tax rates.

Axel Merk, president and chief investment officer of Merk Investments, a California-based firm, noted that the yield on 10-year U.S. treasuries has dropped, an indication the bond market does not expect dramatically higher economic growth that would need to be reined in by the Federal Reserve raising interest rates. 

He predicts Democrats will vote along party lines against tax legislation and a good numbers of conservatives will vote with them because of deficit concerns. 

“Most likely we’ll get a minor tax cut and not a big tax reform and basically what that means is that real growth is not going to accelerate,” he said. “We’re seeing that being priced into the market with treasuries getting stronger.

“Long-term interest rates are not rising because long-term growth prospects are not increasing,” he said, adding “there’s too much hope” in Washington that tax reform is going to get done.

Trump warned at a boisterous campaign-style rally in Phoenix last week that he would be willing to risk a government shutdown to pressure Congress to fund construction of a wall along the U.S.-Mexico border.

At the same time, members of the conservative House Freedom Caucus have insisted that legislation to raise the debt ceiling be accompanied by significant spending reforms, even through Democrats warn such add-ons would be a non-starter.

The outcome of next month’s negotiations are made more volatile by Trump’s strained relationship with Senate Majority Leader Mitch McConnellMitch McConnellBannon breaks with Trump, backs Moore in Alabama Senate race: report Debt-ceiling deadline looming, but don’t panic yet OPINION: Trump, strike a deal: Trade border wall funding for DACA protections MORE (R-Ky.), whom he criticized mercilessly this month for failing to pass ObamaCare repeal legislation.

He also has a sometimes-rocky relationship with Speaker Paul RyanPaul RyanDebt-ceiling deadline looming, but don’t panic yet Lawmakers vow Harvey aid package, but there’s no plan yet Ten notable departures from Team Trump MORE (R-Wis.) who last week expressed disapproval of the president’s decision to pardon former Arizona sheriff Joe Arpaio, a controversial figure who targeted illegal immigrants.

Wall Street isn’t taking the political theater too seriously at the moment.

“If Trump says I’m not going to sign anything unless [funding for] the wall’s in it, I think markets are going to slough that off. They’re going to look at that as theatre because no one believes that’s a legitimate threat,” said Dan Alpert, a founding managing partner at Westwood Capital, based in New York.

But if a crisis emerges over the debt limit or government funding next month, it could deliver a blow to the improving U.S. economy.

“If it turned out there was a sizable number of people other than Tea Party folks in Congress that would potentially add up to a significant number of votes to be meaningful — that would be suicidal   — the market would certainly be reactive at that point,” Alpert said.

“Keep in mind this is a market that has played this game out several times in the past and at least at this point there is a wolf-crying aspect to it,” he added.

Still, he warned sentiments could change quickly.

“If people thought it was something other than theater over the wall then yes of course there could be disruption.”

Zandi pegs the likelihood of a government shutdown higher than the possibility of a federal default scare, though he thinks the chances of either is fairly low.

“There is a small but meaningful probability that there will be a shutdown but broadly speaking I think odds are pretty high the debt limit will be increased and they’ll find some funding for a short period of time,” he said.

 

 

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