President Donald Trump needs two big achievements to keep markets and the economy as glittering assets in his challenging 2020 reelection bid: passage of a new NAFTA and a trade deal with China.
But Democrats are stringing him along on the first — the U.S.-Mexico-Canada Agreement — and he’s engaged in a seemingly endless rope-a-dope with China on the second with no guarantee of success. That’s left the economy as a major wild card for next year.
Businesses are sitting on cash instead of making investments. Growth is stalled at around 2 percent and expected to slow. Jobs numbers are decent but far from “yuge.” And big campaign promises remain unfulfilled. Even Trump’s most ardent supporters acknowledge the president’s reelection bid would face enormous risks if the economy turns down next year.
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“If the economy starts to falter in 2020, Trump can’t win. There are just too many people who don’t like him but would otherwise vote for him in a good economy,” said Stephen Moore, a conservative economist and outside adviser to the president. “And Trump knows that. He gets that. He knows he needs a strong stock market and a strong economy. And getting a China phase one deal done and getting USMCA done would significantly reduce the threat of any kind of slowdown or recession in 2020.”
Trump’s top internal advisers get it as well.
They know the difference between an economy suffering under continuing trade wars — and one in which both a China deal and NAFTA are largely resolved — could be the difference between a one- and two-term Trump presidency.
“These are two very big factors,” Larry Kudlow, Trump’s top economic adviser, said in an interview. “There are a lot of different estimates around but several, including the Council of Economic Advisers, have suggested that a satisfactory China deal plus USMCA could add almost 1 percent to next year’s GDP. That’s a difference between a 2 percent economy and a 3 percent economy and that’s very powerful.”
But both agenda items remain under threat.
House Speaker Nancy Pelosi has said positive things about the USMCA, Trump’s NAFTA successor. But she’s also signaled it could drift into next year as the House remains focused on impeachment proceedings in the dwindling days of the 2019 legislative year. And getting enough Democrats to support a trade deal that is unpopular with the progressive wing of the party in an election year could be highly challenging.
After more negotiations this week, officials sounded an optimistic note about their prospects with Congress. If USMCA fails, Trump would be faced with a decision to either allow the existing NAFTA deal to remain in place or follow through on threats to kill it, a potentially market- and economy-shattering event.
Recent talk of possible recession in 2020 has largely died down. But it could flare up again in a significant way if Trump fails on both the USMCA and China. That would not only complicate matters for business executives deciding where and how to allocate capital but would hit both producers and consumers with new tariffs.
“If we see China tensions ramp up again on the trade front and moving further into more non- tariff barriers, from China in particular but also from the U.S., you could see a much bigger hit to confidence levels on business and supply chains that are already being challenged,” said Beth Ann Bovino, chief U.S. economist at S&P Global. “Then if NAFTA gets ripped up, the impact would be somewhere around 200,000 lost jobs. And the 2020 recession odds we have now around 25 to 30 percent would certainly worsen and we’d be lucky to get 2 percent growth.”
A 2 percent or worse economy, in which job growth, manufacturing and capital expenditures are all slowing is not one that a president — already facing likely impeachment in the House and the drama of a trial in the Senate — is likely to be able to navigate to victory, even his closest advisers concede.
Trump’s strongest numbers continue to be on the economy, where a recent CNN survey put his approval rating at 55 percent, a factor tied to the low jobless rate and high stock prices. But his overall approval rating was at just 42 percent, a weak number for an incumbent.
That means Trump can’t really afford for the two remaining big-ticket items on his economic policy list — USMCA and a China deal — to fall to defeat in ways that could dent his best reelection argument: “You may not like me, but your life is getting better.”
And if all of that falls apart, investors fear a downward spiral in markets they’ve long considered frothy.
Under this scenario, Trump’s big agenda items fail, he looks even more vulnerable to defeat and businesses begins to worry that a progressive Democrat like Sen. Elizabeth Warren (D-Mass.) or even former Vice President Joe Biden could win and seek to unwind Trump’s tax cuts and deregulation, causing a further pullback in business activity that makes the 2020 economy even worse for the incumbent.
“Let’s say there is a one-in-three chance of them winning, you’d think markets would begin pricing that risk in and so far they haven’t don’t that,” said Moore. “That may be the biggest risk, that Trump faces a negative feedback loop if markets think Warren or Bernie Sanders or someone like that could be president. That’s the death spiral for him.”
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