Trump’s Troubles

This may well be the worst of times for President Trump since his election victory almost three years ago. A mere 37% of Americans approve of the way he is handling his job, according to a CNBC Economic Survey. That is the lowest level of his presidency. Fifty-three percent disapprove. Worse still for a President running on his economic record, only 42% approve of his handling of the economy, while 50% disapprove, only the second time since he took office that more Americans disapprove of his handling of the economy than approve.

Adding to the President’s woes is some less-than-cheerful news about the economy. The Institute for Supply Management’s index of manufacturing activity fell in September to its lowest level since June 2009, when the economy was just emerging from the Great Recession. It now stands at 47.8, which is below the 50-mark that separates growth from contraction. With inventories relatively high, there is little prospect of corner-turning anytime soon.

Although manufacturing accounts for only 11% of total GDP, the ripple effects of its decline can swamp the transport sector that moves its products, the warehouse sector that stores them, and the retail sector that sells them. Which is why the ISM services index expanded last month at its slowest pace in three years, although it remains above the important 50-mark.

Business investment declined in August and is 1.7% below last year, due in part to uncertainty stemming from the tweeter-in chief’s contradictory messages. Household spending, the driver of past growth, rose only 0.1% in August from July, well below the 0.5% it averaged in the first seven months of the year. Most important, of the 136,000 jobs created in September, only 114,000 were in the private sector. The others were largely census-takers hired temporarily by the government.

More bad news for Trump. The Federal Reserve Bank of Chicago follows the economies of five Midwestern states, four of which were Trump country in 2016. The Chicago Fed’s index was below its historical average for the fifth straight month in August. If the four Trump states included in the index had ended up in the Clinton column, she would have been choosing the new drapes at 1600 Pennsylvania Avenue.

Some analysts find solace in the prospect that consumers will buy around 17 million vehicles this year, for the fifth consecutive year. But about one-in-three loans taken out to finance those purchases had terms longer than six years: ten years ago that number was one-in-ten. Ben Eisen and Adrienne Roberts of the Wall Street Journal say these loans have “created an illusion of affordability … Some American middle-class buyers can’t afford a middle-class lifestyle.” Monthly payments will continue “well past when the brake pads give out…”.

Others are looking to the housing industry to give the economy a shot in the arm. Thanks to low rates on the typical 30-year mortgage, around 3.65% compared with 4.71% last year, sales of new and existing homes have picked up, the latter rising to the highest level in seventeen months. And the future looks bright: housing starts and building permits hit a 12-year high in August. Which is why shares in home builders Lannar, NVR and PulteGroup have shot up and are hovering around their 52-week highs.

Which is one reason the economic slowdown is unlikely to turn into a recession. Another is that with the unemployment rate (3.5%) at its lowest level since 1969, and average hourly earnings up 2.9% over last year, consumer spending is likely to remain strong enough to sustain economic growth at “close to potential” in the second half of this year, according to Bloomberg. Pantheon Macroeconomics now expects consumer spending this quarter to come in at 2.9%, down from its earlier guess of 3.6%, but still high enough to enable the economy to avoid a recession.

Most observers attribute the slowing of the US economy to ill winds blowing from the troubled Chinese and EU (especially German) economies, and to Trump’s trade war. A good part of the decline of the manufacturing sector was in fact due to a fall in exports, a consequence of the trade war’s retaliatory tariffs and of the disruption of overseas supply chains. No relief is in sight: the World Trade Organization expects world trade to grow this year at only an anemic 1.2%, less than half the rate it forecast six months ago and the slowest since 2009.

Trump does not agree that his trade war is complicit in the slowdown. His villains are, first, the “boneheads” at the Federal Reserve Board’s monetary policy committee who are keeping interest rates and therefore the dollar too high. Second, “All this impeachment nonsense … is driving the Stock Market and your 401Ks down”. Some 45% of respondents to the CNBC poll agree. With reason.

Congressional approval of the new trade deal with Canada and Mexico is now lower on the Democrats’ priority list, which will hurt many important companies. A bipartisan deal on health care, removing the uncertainty surrounding that sector, and meeting the needs of voters for whom adequate care is the n umber-one concern, is unlikely. And, despite the renewal of negotiations this week, a comprehensive trade deal is more elusive than ever as Chinese negotiators stall in the hope that Trump will be replaced by a “more reasonable” adversary, perhaps even before November 2020.

For investors, all of this adds up to good news. The data are good enough to suggest continued growth and bad enough to give those Fed policymakers who want to lower interest rates a basis for doing just that, providing a fillip to share prices. Never mind that with Bernie Sanders’ heart problem and Joe Biden’s bumbling performance on the campaign trail and entanglement in the Ukraine scandal, Elizabeth Warren seems virtually assured of the Democratic nomination. And she has painted a bull’s eye on the backs of investors, “the rich”, and Wall Street. Ask not for whom the bell tolls.