When Donald Trump won the presidential election in 2016, some economists worried that trade wars and other Trumpian disruptions would cause a recession.
A year into the Trump presidency, the picture is quite different. Trump hasn’t slapped tariffs on Chinese or Mexican imports or imposed major new limitations on immigration, policies that would have hampered economic growth. What he has done is shepherd major tax cut legislation through Congress, with a bill due to be signed into law in early January. That will boost the economy rather than slow it.
“2018 and 2019 should be strong years, because a deficit-financed tax cut is fuel to the fire,” Mark Zandi, chief economist at Moody’s Analytics, tells Yahoo Finance in the video above. “It’s raw fiscal stimulus that’s going to juice things up.”
Moody’s Analytics predicts that the tax cuts will increase GDP growth by 0.4 percentage points in 2018 and 0.2 points in 2019. That should push overall growth close to 3%. But the boost will probably be temporary.
Washington will borrow about $1.5 trillion during the next decade to pay for the tax cuts, and that borrowing will slowly affect the economy in other ways, offsetting some of the stimulus tax cuts normally produce. An increase in federal debt tends to push up interest rates, for one thing. This could happen at the same time a tight labor market is likely to push wages up, which the Federal Reserve is already concerned about. Rising wages contribute to inflation, and the Fed has been gradually raising interest rates as a countermeasure. The Fed could raise rates faster than expected if inflation seems likely to intensify, and that’s where the trouble could lie.
The economy has been growing since 2009, with the expansion in its ninth year. That’s long. The longest expansion since World War II lasted only 10 years, from 1991 to 2001. “This expansion should beat that one,” says Zandi. But the stimulus effect of the tax cuts will peter out in a couple of years, just as inflation concerns are intensifying and the Fed is raising interest rates in response.
That provides a clue as to when the expansion might end. “If I had to pinpoint when the next recession would occur, it would be sometime in 2020,” Zandi predicts. That’s an election year, of course, and a contracting economy would probably be voters’ top concern. The catch is that recessions don’t normally announce themselves, and it’s usually months before data confirms the end of an expansion and the start of a contraction. So President Trump, if he runs for reelection, would most likely dispute assertions that a recession had dawned.
It doesn’t take a deep recession to upset voters, however. President George H. W. Bush lost a reelection bid in 1992 largely because of a modest recession that preceded a prolonged era of growth and prosperity. Nobody knows how deep the next recession will be, but a key factor for Republicans will probably be the extent to which the 2018 tax cuts, which will benefit businesses and shareholders right away, have trickled down to ordinary workers by the time the economy turns south. If they haven’t felt the benefit yet, they’ll speak their minds at the polls.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman