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Trump is about to face his biggest test so far on the economy



President Trump will have to make several important trade and budget decisions in the coming months, as the US economy faces the brunt of his mandate, forcing him to decide to recalibrate his year-long recession fears next.

Trump has threatened to escalate trade disputes with China, Mexico, the European Union and Japan, scaring business leaders and pushing some to cut investment. Similarly, talks on the budget and the debt ceiling with congressional leaders from both parties flew, suggesting the possibility of a new government shutdown in October.

Uncertainty – and the slowdown in the global economy – led JPMorgan Chase to predict Monday that there is a 45% chance that the US economy will go into recession next year, up from 20% in early 2018.

Also Monday, a key indicator of New York's manufacturing industry recorded the largest one-month drop ever recorded. This was the last sign that after a relatively strong economy last year, the political and economic forces seem to be combining this year to darken the economic outlook. This could be a problem for Trump, who has tried to tout the performance of the economy as the key to his re-election.

"The key question is: can you have a soft landing for the economy?" Said Vincent Reinhart, chief economist for Mellon and former Federal Reserve economist. "We are going through a slowdown and nobody likes it. It does not feel good. "

The slowdown in the economy and uncertainties surrounding Trump's upcoming actions are causing a delicate situation for the Fed, which will meet on Tuesday and Wednesday. Trump is counting on the central bank to lower interest rates in order to boost economic growth. However, Fed officials are trying to reconcile worrying information about the economy with other areas of relative strength, including low unemployment and high consumer spending.

At the same time, Trump has the power to reduce risks to the economy – on budget and trade.

Legislators are working on the conclusion of a budget agreement that could avoid a fall closure, increase the federal debt ceiling and prevent sharp cuts in spending. But until now, even Republicans have struggled to reach an agreement with the White House, which would be the prelude to a broader negotiation with the Democrats. Similar efforts early in the year resulted in the longest government shutdown ever after Trump applied for funding for his border wall.

Another shutdown of the government, flirting with exceeding the federal debt limit and sharp spending cuts, would affect all the economy.

Similarly on the trade, White House officials, Republican leaders and business leaders said that if problems were resolved quickly, it would turn the economy around at the horizon. 2020. But until now, most of the negotiations are either unresolved or pending, even though Trump will meet with Chinese President Xi Jinping at the Group of 20 meeting next week.

"The biggest self-inflicted risk to growth today would be trade with the south," Jamie Dimon, general manager of JPMorgan, told the press.

The president has assumed full responsibility for the performance of the economy, calling the "Trump economy". In the first year of his presidency, his key economic advisers engaged in a rigorous debate on how to shape politics, and Trump was reluctant to take action that would undermine growth.

But over the past year, his team has been largely deferential to Trump's instinct, particularly with respect to trade, and he was willing to consider government tariffs and closures in the future. the hope of achieving other political goals, even if they pose risks to the economy.

On Saturday, Trump dismissed concerns and said the economy's performance was historic and was just beginning. He warned of a slowdown when he lost the next year. It often refers to economic parameter records, but seldom specifies the records it refers to.

"The Trump economy sets records and still has a long way to go," he wrote on Twitter. "However, if someone else took over in 2020 (I know the competition very well), there would be a stock market crash like we've never seen it before!" KEEP AMERICA TO GREAT.

Next month, the economy will record the longest expansion in US history, growing for more than a decade since the official end of the Great Recession in 2009. Trump boosted growth with tax cuts , higher public spending and increased deregulation, but the Democrats accused one of these changes constituted a "high sugar" that will fade and ultimately hurt the economy.

There are many signs that the strength of the economy last year may be short-lived.

Manufacturing indexes dropped to the lowest levels of the Trump presidency, reflecting weaker demand and fears that its adversarial approach to trade is causing domestic and foreign firms to cut back on spending.

In the midst of signs of decline some manufacturers, Trump attacked. He has criticized several iconic companies, including Harley-Davidson and General Motors, about job-killing ads in the country. He said last week that he was pushing Lockheed Martin not to reduce the production of a helicopter factory in Pennsylvania.

Trump has tried to point fingers at some companies that, in his view, cut jobs, but the impact of these threats is unclear. Businesses reduced their capital investments in the first three months of the year, although they continued to benefit from significant tax cuts at the end of 2017.

The Morgan Stanley Business Conditions Index recorded the largest one-month drop in June and is now at its lowest level since December 2008, when the US economy was in deep recession.

"We are seeing this underlying deterioration. The bleeding has been slow, "said Lindsey Piegza, chief economist at Stifel Fixed Income. Piegza was particularly alarmed by the slowdown in private domestic sales, indicating that US demand is expected to weaken.

Analysts and White House officials, however, pointed out that there were still plenty of positives in the economy and warned against an exaggerated reaction of up to a few jerks in the data .

"Trump has deep beliefs about trade. A few short-term data points will not change their minds, "said a senior official who declined to be named because they were not allowed to speak in public.

About 70% of the US economy is driven by consumer spending and consumer confidence remains strong, with retail spending increasing in April and May. Inflation remains low and wages have grown faster for working-class Americans.

The US economy created only 75,000 jobs in May, much less than expected, but the unemployment rate is 3.6%. White House officials believe that wages and consumer spending will help the economy recover, despite other factors, even as companies continue to cut back on investment.

"In the end, you have to judge if the data makes sense," said Kevin Hassett, chairman of the council of economic advisers to the White House, during an interview. "What makes sense to me is that we are saved from the current economic slowdown because of the very rapid growth of incomes."

Trump and the business leaders both rely on the Fed for a possible recovery. The stock market has rebounded in recent weeks, mainly because of investors' belief that the Fed will intervene to counter any widespread tariff-related damage.

Wall Street is forecasting a 85% rate cut in July and will closely follow Fed President Jerome H. Powell's press conference on Wednesday, looking for signs that he is ready to act soon.

"The Fed will try to act as soon as possible. If they wait too long, it will be much harder to get out of trouble, "said Andrew Levin, a former Fed economist who now teaches in Dartmouth.

The main concern, however, remains how Trump plans to resolve the growing trade dispute with China. Trump imposed tariffs of $ 250 billion on Chinese imports and threatened to penalize an additional $ 300 billion in imports if China did not accept major concessions. Discussions with China began last year and continued for months before ending in May. Trump said that if Xi did not meet him next week at the G-20 summit in Japan, the United States would be willing to go ahead with new tariffs.

"The economy is not close to a recession this year, but next year will be much more problematic," said Greg Valliere, chief policy strategist at AGF Investments, which publishes a daily newsletter. "If we leave in 2020 without any agreement with China, it's going to be very negative for him in terms of business uncertainty, farmers' uncertainty, weaker economic growth and maybe even more." 39, a small touch of inflation. "

More than 320 companies and industry groups are testifying in front of the US Trade Representative's office this week and next week about their fears that the imposition of tariffs on all imports would lead to a significant increase in prices, a loss of jobs and a reduction in profits. But in the White House, some advisors point out that hundreds of thousands of companies have not bothered to testify or even comment on rates.

The US economy grew 2.9% in 2018, its highest level since 2015, according to the Commerce Department. White House officials predicted that growth would be even stronger this year, but few others agree. The economy grew 3.1% in the first three months, but a number of analysts predict growth of less than 2% between April 1 and the end of September.

Trump has shown no signs of receding, especially in his trade fight with China or in his budget stalemate with Democrats and Republicans on Capitol Hill. But he has also shown a penchant for the sudden turnaround in the face of bad polls or a decline in the stock market, figures he closely monitors.

"The White House does not need to panic, but there are reasons to be nervous," said Douglas Holtz-Eakin, an economist, who had advised Senator John McCain (R-Ariz) when of his run for president in 2008. "We would always slow down after a growth of 3%. The question is, what? If we slow down to 2.5%, it's a huge win. If we slow down to 1.5%, the re-election sale will be much more difficult. "


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