Trump bump in US economy may end up squashed by political turmoil

Economists say that the Trump fillip to the US economy may be short lived given the political turmoil in Washington.
Economists say that the Trump fillip to the US economy may be short lived given the political turmoil in Washington. PHOTO: REUTERS

WASHINGTON (BLOOMBERG) - The Trump bump in the US economy that many forecasters had penciled in for next year is looking increasingly iffy.

President Donald Trump's mounting political difficulties are raising doubts about his ability to push through the tax cuts and infrastructure spending increases that economists had been counting on to lift gross domestic product.

"At the very least, what is very likely is a delay in any form of fiscal stimulus," said Gregory Daco, head of US macroeconomics at Oxford Economics. "But there is also a risk that it gets dropped all together."

If that happens, growth may remain mired in the lackluster rut of 2 per cent or so it's been stuck in over the last eight years, rather than accelerating to Daco's forecast of 2.7 per cent in 2018.

Economists stressed that it's still too early to make any definitive judgments about what impact Trump's troubles will have on his policy agenda and the economy.

Investors, for their part, weren't waiting around. Major USstock indexes Wednesday had their worst session in eight months, while bond prices and the US dollar fell as the turmoil engulfing the president spilled into financial markets.

Traders also marked down the odds of an interest-rate increase by the Federal Reserve next month to about 60 per cent from 80 per cent a week ago. The chances of a follow-on move in September were also lowered, based on movements in the money markets.

Fed policy makers in March had forecast two more rate hikes for this year after raising them for the third time since the end of 2015. Officials have been cautious about counting on a fiscal policy-induced jump in growth next year and so may not be as worried as investors by its apparent fading prospects.

"As long as growth remains around 2 per cent, they haven't much choice but to continue to normalize policy," given that the unemployment rate is at a 10-year low of 4.4 per cent, said Mark Zandi, chief economist at Moody's Analytics Inc.

Former Fed Chairman Ben Bernanke told a conference in Las Vegas on Wednesday that he expects the central bank to continue to raise rates "very slowly" and to begin shrinking its US$4.5 trillion balance sheet in 2018.

Trump is facing the deepest crisis of his presidency over allegations he tried to stop an FBI investigation of his former National Security Adviser Michael Flynn. Democrats have raised the possibility that Trump attempted to obstruct justice, an impeachable offense.

The White House was already on the defensive over the president's firing of US Federal Bureau of Investigation Director James Comey a week ago and over a report that Trump disclosed sensitive intelligence to Russian officials.

Republican lawmakers said they're trying not to get distracted from an ambitious agenda that includes health care reform and an overhaul of the tax code.

"As long as Congress does its job under the Constitution, nothing is going to stall," said Senate Judiciary Chairman Chuck Grassley of Iowa.

The drama in Washington is taking place against the backdrop of an economy widely perceived as solid, with robust hiring and a reviving manufacturing industry.

"If we're going to go through a period of heightened political uncertainty, this would be the time to do it" given the economy's strength, Zandi said.

For the first time in years, the US is being aided by strength abroad.

"The global economy is looking better than anticipated, particularly in Europe," said John Lipsky, a former senior International Monetary Fund official who is now at the Johns Hopkins School of Advanced International Studies in Washington. "Global trade volumes seem to be picking up."

Even if the president is forced out - a scenario economist Allen Sinai called "Trump self-destructs" - the US should be able to avoid a recession, the president of consultants Decision Economics said.

The economy's biggest vulnerability may be the inflated stock market, which until recently was trading at record highs.

A sustained drop in share prices could shake confidence among businesses and consumers and cause them to delay some spending, said Nariman Behravesh, chief economist at consultants IHS Inc.

"That would erode growth," but not stop it, he said.