Trump’s economy teetering on trade tensions, volatile markets

Rising trade tensions with China, a fading economic outlook and questions about rising interest rates are posing new challenges to President TrumpDonald John TrumpChelsea Clinton announces birth of third child Ukrainian officials and Giuliani are sharing back-channel campaign information: report Trump attacks 'the Squad' as 'racist group of troublemakers' MORE as he prepares for his reelection campaign.

Sputtering negotiations between Washington and Beijing over tariffs and other trade barriers rattled financial markets this past week, frightening traders who were already bracing for a possible recession in 2019.

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Even though the world's two economic superpowers have agreed to work out a deal by the end of February, the ongoing feud is now accompanied by broader concerns about the long-term strength of the U.S. economy.

Friday’s respectable employment report from the Labor Department showed encouraging signs of wage growth from November, but it also bolstered the case for a December interest rate hike by the Federal Reserve, sending Wall Street reeling. The Dow Jones Industrial Average lost 558 points by the end of trading Friday, a 2.2 percent drop, while the S&P 500 and Nasdaq composite fell 2.3 percent and 3 percent, respectively.

The contrast poses severe messaging problems for Trump, who’s touted stock market performance as the preferred economic report card for his administration. While the president frequently touted the Dow as it soared through 2017, he has been mum about the protracted bleed-off in U.S stocks.

And despite consistently low unemployment, currently at a 49-year low of 3.7 percent, economists say they see growing signs that the Trump economy is trending downward.

Grant Thornton chief economist Diane Swonk is forecasting that a recession will start in the first half of 2020, six months earlier than she had initially predicted. If she’s right, Trump will face the herculean task of securing reelection while the economy is contracting.

“Election years don’t stop recessions from occurring,” Swonk wrote in a research note this past week. “That said, recessions are notoriously hard to time. No one knows for sure which straw will break the camel’s back, only that they are piling up.”

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Analysts are keeping close watch on a slew of economic risks as 2018 comes to a close, with Trump's trade policies topping the list. The president has threatened to withdraw the U.S. from the North American Free Trade Agreement if Congress doesn’t approve a revised trade deal with Canada and Mexico, and he has sent mixed signals about a potential agreement with China.

Trump sent stocks soaring Monday when he declared “a big leap forward” with Chinese President Xi Jinping after the two met last weekend at the Group of 20 summit in Argentina. The president said his administration and China have agreed to work out a deal within the next 90 days to increase Beijing’s purchase of American agricultural goods and suspend tariffs on U.S. cars if America holds off on further tariffs.

The exact terms of the negotiations are unclear, creating market uncertainty that led to concern and then action in the form of a sell-off.

Initial optimism about the deal faded Tuesday when Trump, declaring himself “a Tariff Man” on Twitter, warned of steep consequences for China if Xi failed to meet his demands. Canada’s arrest of a top Chinese tech executive on behalf of the U.S. also inflamed Washington's relationship with Beijing.

“Investors have a list of worries, from slower corporate earnings growth to higher interest rates, but the potential of an escalating trade war is at the top of the list,” said Mark Zandi, chief economist at Moody’s Analytics, in an email to The Hill. “The President appears to believe his negotiating tactics will win the day, but instead they are undermining confidence and delaying the end to the war.”

A tentative, even modest agreement between Trump and Xi could stop the bleeding on Wall Street. But more angry tweets and abandoned talks could further batter Trump’s preferred economic barometer.

Some U.S. businesses have been kneecapped by Trump’s tariffs on imported steel, aluminum and Chinese goods, along with foreign retaliation on U.S. agricultural exports. The U.S. trade deficit reached $55.5 billion in October, the highest level in a decade, while American businesses paid $6.2 billion in tariffs, according to a pro-trade group's analysis of federal data.

The economic crunch from Trump’s trade battles will weigh on the Fed in two weeks when the bank’s policymaking committee meets to discuss whether to hike interest rates. The Fed is expected to raise rates in December, but could potentially signal an imminent pause as it considers the path of the economy.

The Fed has been gradually hiking rates since 2015 as the economy recovered and joblessness plummeted.

Trump has blasted the Fed and its chairman, Jerome Powell, for those rate increases, breaking with most of his party to accuse the central bank of harming the economy. Rising interest rates also suppress stock market performance, making it harder for Trump to tout the economy.

The U.S. added 155,000 jobs in November, falling below economists’ expectations. Steady declines in housing sales, exports and business investment have also raised alarms about the long-term prospects for the economy.

But the employment report also showed wages rising at a 3 percent annualized level, an encouraging increase after years of modest gains.

Traders saw that data as support for a Fed rate hike, and the Dow closed with a loss of more than 500 points. U.S. stocks have dipped back into negative territory for the year and suffered their worst week of losses since March.

But federal data on jobless claims, manufacturing output and inflation set to be released next week could complicate the Fed’s decision, increasing the odds of more market volatility.

“This keeps the Fed on track to raise rates later this month, but it also supports a likely downgrade in the number of rate hikes the committee projects for 2019 from three to just two,” said Curt Long, chief economist for the National Association of Federally-Insured Credit Unions. “The November jobs report was sturdy but uninspiring.”