Economic Reality Bites Wall Street and Trump
By John Cassidy
June 12, 2020
Donald
Trump often sounds angry on Twitter; sometimes, he sounds nuts. On Thursday
morning, he sounded like a man who had just emerged from a doctor’s office with
a grim prognosis that he couldn’t bring himself to accept. “The Federal Reserve
is wrong so often,” he wrote. “I see the numbers
also, and do MUCH better than they do. We will have a very good Third Quarter,
a great Fourth Quarter, and one of our best ever years in 2021. We will also
soon have a Vaccine & Therapeutics/Cure. That’s my opinion. WATCH!”
The President was referring to the Fed’s warning, on Wednesday,
that the economy would take years to recover from the recession that began in
March, when states started to impose economic shutdowns because of the
coronavirus. After completing a two-day meeting, the members of the Fed’s main
policymaking committee released a set of projections which showed that they
expect the official unemployment rate, which understates the real rate, and
which is currently 13.3 per cent, to be 9.3 per cent at the end of 2020, 6.5
per cent at the end of 2021, and 5.5 per cent at the end of 2022. As recently
as February of this year, the jobless rate was just
3.5 per cent.
These gloomy forecasts alone would have been enough to irk Trump.
But they were also accompanied by some downbeat comments from Jerome Powell,
the Fed chairman, who has often been the object of the President’s jibes. At a
press conference, Powell identified signs of “a stabilization, or even a modest
rebound in some sectors of the economy.” But he went on to say that “well into
the millions” of people won’t get their jobs back even after the shutdowns end,
and added, “It could be some
years before we get back to those people finding jobs.”
For one day, at least, Wall Street took Powell’s words more
seriously than Trump did. On Thursday, the Dow Jones Industrial Average shed 1,861.2 points,
closing down almost seven per cent. Given the stock market’s remarkable rally
since March—the biggest upward move ever seen in such a short period—one down
day doesn’t mean very much. (On Friday morning, the Dow rebounded somewhat.)
But from a political perspective as well as an economic one, what is important
is that Powell’s warning, combined with news that the number of covid-19 infections is rising sharply in
several states, has undermined Trump’s claims that the
American economy is about to take off “like a rocket ship.” This was a dubious
idea to begin with, of course. There was always going to be a pickup in
employment when states ended their shutdowns and businesses called workers back
from furloughs. That happened earlier than expected—and perhaps earlier than it
should have, as the figures for new covid-19 cases in places like Arizona
and Texas suggest. Last week, when the jobs report for May showed payrolls rising
by 2.5 million, and Trump used his astronautical simile, the President chose to
ignore the fact that more than thirty million Americans were still out of work
or working part-time for economic reasons. On Thursday, the Labor
Department reported that another
1.5 million people filed for unemployment benefits in the past week.
Another weakness of the argument that the economy would come
roaring back is its parochialism. Thanks to globalization, major economies tend
to move in tandem more than they used to, and the covid-19 pandemic has “delivered a global economic shock of
enormous magnitude, leading to steep recessions in many countries,” as the
World Bank noted, in an analysis
released this week. Looking ahead, the Bank predicted that global G.D.P. would
decline by 5.2 per cent in 2020, which would make this “the deepest global
recession in eight decades, despite unprecedented policy support.” And the
worldwide downturn would be even deeper “if bringing the pandemic under control
took longer than expected, or if financial stress triggered cascading
defaults,” the Bank warned.
This somber analysis has been echoed by the Organization for
Economic Co-Operation and Development, an intergovernmental research group
based in Paris. In its latest analysis of the world economy, which was
released at the start of this week, the O.E.C.D. predicted that G.D.P. in the
Eurozone and the United Kingdom would decline by more than ten per cent this
year, which is virtually without precedent; China and India, meanwhile, would
also see their economies contract for the first time in many years. Laurence
Boone, the O.E.C.D.’s chief economist, played down any hopes of a rapid global
rebound. “Most people see a V-shaped recovery, but we think it’s going to stop
halfway,” Boone said. “By the end of 2021,
the loss of income exceeds that of any previous recession over the last 100
years outside wartime, with dire and long-lasting consequences for people,
firms and governments.”
To be sure, this is merely a prediction, and forecasting has made
idiots of many eminent economists. But you don’t have to rely on economists, or
Powell, the Fed chairman, to tell you that things are unlikely to snap back to
normal. Just look around. On Wednesday, Starbucks announced that it
would close up to four hundred of its North American coffee shops and open a
number of pickup-only locations. Alaska Airlines said it was cutting
three thousand jobs. Major hotel chains in cities across the country are
extending layoffs to affect thousands of their employees. In Florida, one of
the first states to reopen, Google mobility data suggests that visits
to retail and recreation locations are still down twenty-eight per cent. The
over-all picture is of an economy groping, rather than sprinting, its way back.
What does this imply for the political outlook? Earlier this week,
I noted that, with Trump’s poll ratings
sagging, the best thing he has going for him is the perception, however
unfounded, that he is better equipped than Joe Biden to insure an economic
recovery. Forty-eight per cent of respondents to the latest Wall Street
Journal/NBC News poll said that they
trust Trump over Biden to reduce the unemployment rate, compared with the
thirty-five per cent who said they trusted Biden more. A new poll from The
Economist and YouGov has Trump’s approval rating on economic issues five
points higher than his over-all approval rating.
Perceptions can change, though. After the warnings from Powell and
others about the likelihood of persistent mass unemployment, a more subtle
politician than Trump would be looking to temper expectations and urging
Congress to pass another stimulus package quickly. Subtlety isn’t in his
nature, of course. With his incessant economic boosterism, he’s strapped
himself into his own rocket ship. If the arc of the vessel levels off, or,
worse still, points back to Earth, there will be only one thing left for him to
do: blame Powell, or China, or Anthony Fauci—anybody but himself.
