Can Donald Trump create a recession?

Can Donald Trump create a recession?
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The past week has seen economic turbulence of a most peculiar kind. In the past, markets have tumbled and economies have gone south due to such things as the failure of a prominent financial institution or the crash of a currency. Financial crises usually have visible and specific triggering events; recessions come upon us with less drama, for example with declining home purchases leading to construction layoffs and widening unemployment. Other than war, economic turbulence has usually come from the economy.

This week, we almost had crisis by whipsawing Tweet. Escalation and de-escalation of the trade war with China sent many grizzled market veterans to a new level of incredulity and simple confusion. Which way is this going? Who knows?

There are signs of a weakening economy, but this weakening occurs in a fairly healthy picture overall. Manufacturing is sending signs of trouble, with the bellwether Purchasing Managers’ Index below the recessionary threshold of 50 last week. The yield curve is inverted, often a signal from financial markets that investors are expecting the economy to slow. But retail sales were strong, and consumption has been solid for quite some time.


It has been said that expansions do not die of old age, they are killed. But that phrase referred to the Federal Reserve’s behavior pattern: Faced with rising inflation as the economy grew rapidly, the Fed would raise interest rates to keep inflation in check, giving an overheated economy a cold bath. Recession was the result.

Now, we have a president who desperately wants a pre-election economic boost but is engaged in a volatile and seemingly unpredictable set of trade wars. Claims that Chinese negotiators want talks have little traction after the stream of exaggerations and reversals of the last three years.

In this not very brave new world, it is hard to imagine how corporate leaders can make the long-term investment decisions that would drive economic growth forward. But that does not necessarily mean that a recession is around the corner, either.

There could yet be a precipitating event that ignites a financial crisis. Or a face-saving agreement with Xi Jinping. Wildly varying scenarios can be imagined.

Other than pursuing the trade war, the president’s main tactic has been to attempt to pressure the Federal Reserve to lower interest rates further. But Chairman Powell’s measured speech at the Fed’s annual Jackson Hole gathering last week confirmed that the Fed is not rushing to the rescue. Central banks are more often expansion killers than expansion creators, due to their fear of inflation. Additionally, although the Fed can react rapidly to fast-developing events, as it did in 2007-2008, the long lag between Fed interest rate changes and the actual effects on the economy make it hard to recognize a coming recession soon enough to do anything that would actually prevent a recession from ever happening. The Fed does best at responding after the crisis hits.


The Fed’s own view of the economy remains fairly positive. President TrumpDonald TrumpGiuliani used provisional ballot to vote in 2020 election, same method he disparaged in fighting to overturn results Trump gets lowest job approval rating in final days as president Fox News' DC managing editor Bill Sammon to retire MORE seems to view things exclusively through a reelection lens, so his comments have little weight at the Fed. Many economists do think that increased inflation is unlikely, leaving the Fed some room to support continued expansion. But the Fed is aware that it has little ammunition, since the Federal Funds Rate is already quite low by historical standards. The Fed is reluctant to cut now, when the need is not obvious, since it could find itself with few arrows in its quiver if a crisis or deep recession occurred.

The bizarre goings on at the G7 confirm that we are in new territory. Should a significant financial crisis occur, it is hard to imagine the U.S. co-operating with other countries to respond the way it did in 2008.

At this point, there is economic danger brewing both at home and abroad. I do not want to overstate the degree to which the global economy can be directed by political leaders. But the picture of a rudderless, directionless world is not comforting.

Evan Kraft is the economist in residence for the Economics Department at American University. He served as director of the Research Department and adviser to the governor of the Croatian National Bank.