There is no denying that Tuesday was a bad election for the Trumpublicans. Although votes are still being counted, and the GOP will probably pick up a couple Senate seats, final results will likely show the biggest loss of GOP House seats since 1974. That poor showing looks even worse when you consider the incumbent party benefits from an ongoing economic boomlet. Economic growth has accelerated, wages are growing, and the unemployment rate sits at the lowest level since 1969. Consumer confidence is at its highest level in 18 years.
Yet none of that was enough to save the House from the spillover of an unpopular president. Some Republican strategist somewhere must be gaming out what to do if that boomlet goes bust, and the economic tailwind turns into a headwind. And if they aren't, they really should. The more than nine-year-old economic expansion is the second longest in U.S. history. And while expansions don't die of old age, they are often accidentally killed by the Federal Reserve.
Here's what usually happens: Late in an economic cycle, a tight labor market can overheat and lead to rising inflation. In response, the Fed begins raising interest rates — hopefully just enough to keep inflation at bay without tightening financial conditions so much that the economy slips into a recession. The goal is a cooldown or "soft landing," but the Fed is rarely successful. Usually the expansion comes crashing down, and the unemployment rate rockets higher.
Maybe Jerome Powell's Fed will be successful where so many others weren't. Maybe it can carefully calibrate its tightening phase and avoid a "hard landing." But President Trump is obviously worried it can't, which explains his escalating attacks on the chairman he nominated last year. "Every time we do something great, he raises the interest rates," Trump said in a Wall Street Journal interview late last month, adding that Powell "almost looks like he's happy raising interest rates."
The president seems to be suggesting that if the economy tanks, Americans should blame Power rather than the guy who picked him.
Of course, the irony here is that Trumponomics is one reason the Fed is raising rates as quickly as it is. The economy was already pretty boomy when Trump signed the Tax Cuts and Jobs Act last December. The unemployment rate had steadily declined to 4.1 percent from 10 percent in 2009. Few economists on the left or right were arguing for a budget-busting tax cut. Indeed, many warned that massive fiscal stimulus in an economy at or near full employment would force the Fed to lean harder against it. And that's just what seems to be happening. But the more severe the Fed action, the greater the chances of a monetary mistake.
Wall Street banks are reluctant to predict recessions, but many are predicting an economic slowdown by the 2020 election. And it's not just because of the Fed. The baseline growth potential of the American economy is probably a lot lower than what we've seen lately with 4.2 percent growth in the second quarter and 3.5 percent in the third. But this isn't a 4 percent economy or a 3 percent economy. It might not even be a sustainable 2 percent economy. The higher rates of growth we've seen lately have come from bringing workers off the sidelines. But as JPMorgan economist Michael Feroli notes in a new report, "With participation rates for many demographic groups now returning to pre-[financial] crisis levels, it will be harder to squeeze further gains from above-trend labor supply growth."
So unless the U.S. is going to start importing lots of new workers, much faster economic growth will require much greater worker productivity. And there's little sign of that happening. The tax cut was supposed to boost business investment and then productivity growth — not just temporary consumer demand — but there is nothing in the data to suggest this thesis is panning out. "No amount of wishing it away will change the fact that we remain mired in a slow growth regime," Feroli concludes.
Even without a true recession, the 2020 Trump economy might resemble the 2016 Obama economy that Hillary Clinton ran on and Trump slammed as a disaster. Real GDP growth that year was 2.2 percent. The median Fed forecast for 2020 is 2.0 percent growth, with some investment firms expecting something closer to 1.5 percent. It was that sort of meh economic growth that led the well-known forecasting model developed by Yale's Ray Fair to predict Clinton would get just 44 percent of the two-party vote. (The actual number was 51 percent.) In other words, Clinton outperformed what would have been expected given so-so economic conditions, an error that Fair speculated resulted from "Trump's personality."
Exit polls on Election Day 2016 put Trump's favorability at just 38 percent, five percentage points worse than Clinton. The same polls on Tuesday put Trump's favorability at 45 percent, boosted perhaps by recent strong jobs and GDP reports. What might they be on Election Day 2020 with an economy fading rather than accelerating and Trump as Trumpy as ever? There might not be enough refugee caravans in the world to give the president a second term.