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The month Trump’s economy faltered

The Washington Post logo The Washington Post 8/22/2019 Damian Paletta, Robert Costa, Josh Dawsey, Philip Rucker

Steven Mnuchin wearing a suit and tie: Mnuchin, left, and Lighthizer met with Chinese Vice Premier Liu He in Shanghai in late July.

Mnuchin, left, and Lighthizer met with Chinese Vice Premier Liu He in Shanghai in late July.
© Ng Han Guan/Pool/Reuters

Top White House advisers notified President Trump earlier this month that some internal forecasts showed that the economy could slow markedly over the next year, stopping short of a recession but complicating his path to reelection in 2020.

The private forecast, one of several delivered to Trump and described by three people familiar with the briefing, contrasts sharply with the triumphant rhetoric the president and his surrogates have repeatedly used to describe the economy.

Even as his aides warn of a business climate at risk of faltering, the president has been portraying the economy to the public as “phenomenal” and “incredible.” He has told aides that he thinks he can convince Americans that the economy is vibrant and unrattled through a public messaging campaign. But the internal and external warnings that the economy could slip have contributed to a muddled and often contradictory message.

Administration officials have scrambled this week to assemble a menu of actions Trump could take to avert an economic downturn. Few aides have a firm sense of what steps he would seriously consider, in part because he keeps changing his mind.

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Ideas that have been discussed include imposing a currency transaction tax that could weaken the dollar and make U.S. exports more competitive; creating a rotation among the Federal Reserve governors that would make it easier to check the power of Chair Jerome H. Powell, whom Trump has blamed for not doing all he can to increase growth; and pushing to lower the corporate tax rate to 15 percent in an effort to spur more investment. Some, if not all, of these steps would require congressional approval.

“Everyone is nervous — everyone,” said a Republican with close ties to the White House and congressional GOP leaders. “It’s not a panic, but they are nervous.”

This article is based on interviews with more than 25 current and former administration officials, lawmakers, and external advisers who have been in contact with Trump and his team throughout August. Some spoke on the condition of anonymity because the White House has been requesting that allies and aides keep its economic message intact.

Compounding Trump’s situation, some of the economy’s strains appear to be of his own making, as uncertainty surrounding his trade war with China has frozen much investment nationwide.

“The China trade war is causing most of this,” said Sen. Lindsey O. Graham (R-S.C.), who is close to Trump. “It’s just the world economy is affected when China has a problem.”

Trump has publicly gloated about economic problems in China and Europe — even declaring last Sunday that “the world is in a recession right now” — but those strains appear to be holding back U.S. growth as well.

The economic message emanating from the White House is a product of tensions and debates about how to handle that bracing reality — and Trump’s own stubbornness on trade strategy and his anger about news coverage of the economy. 

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That has led to a month of tense economic policymaking and markets. On Aug. 1, Trump announced new tariffs against Chinese imports. On Aug. 13, he delayed most of them, worried about the impact on the U.S. economy. On Aug. 20, he said he was considering new tax cuts. The next day, he said he had changed his mind.

Amid it all, stocks proved highly volatile and the U.S. and global bond markets rang numerous alarm bells, a far cry from the era of synchronized global growth that had marked Trump’s first two years in office. Other economic soft spots also have emerged, particularly in U.S. manufacturing, a sector Trump had promised to revive.

Although Trump sold himself to voters in 2016 as a master businessman who knew just what to do to rev up the economy, his stewardship could now have major implications for his reelection chances, especially if the more pessimistic forecasts prove prescient.

But beyond the political impact, Trump’s handling of the economic slowdown has opened up the White House to scathing criticism from members of past economic teams, who have contended that the flailing process and lack of traditionally credentialed economists at the helm could exacerbate a downturn.

“The irony here is that Trump’s erratic, chaotic approach to the economy is probably the most significant economic risk factor in the world right now,” said Gene Sperling, who served in top economic roles during the Clinton and Obama administrations. “Their response is just to show even more erratic behavior. It’s economic narcissism. It’s economic policy by whim, pride, ego and tantrum.”

White House spokesman Judd Deere defended the administration’s approach and said officials remain very optimistic about the economy’s performance.

“The White House does not think we are imminently headed for” a downturn, he said. “The fundamentals of the economy are strong because of this president’s pro-growth policies.”

Trump has lauded the economy as the best in U.S. history, while some of his Democratic rivals have said it is barreling toward a recession.

Neither of those descriptions is quite accurate, most economists say. Parts of the economy, particularly consumer spending and the labor market, remain robust. Retail sales are strong, and wages are rising. But business investment, the ballooning federal deficit and trade concerns are creating pressure that White House officials have struggled to explain away. And some of these problems are worsening.

“This administration has not done itself a whole lot of favors in talking about the economy,” said Tony Fratto, who served in senior roles during the George W. Bush administration at the White House and the Treasury Department. “They have done a lot of communicating that is verifiably false on the economy.”

Trump has a lean and increasingly combative economic team, whose members often are at odds with one another on trade and tax policy. Almost all are deferential to the president, but they habitually jostle to advance their causes with him, sometimes maneuvering behind one another’s backs.

White House National Economic Council Director Larry Kudlow and Treasury Secretary Steven Mnuchin have fought for months over Kudlow’s push to index capital gains taxes to inflation, for example, with Trump caught in the middle. The proposal would reduce taxes on investment income, primarily benefiting people with higher incomes, but most economists think that would do little to spur immediate economic growth.

White House economic team meetings are less structured than when Trump’s aides collectively pushed a giant corporate and individual income tax cut into law two years ago. Sometimes aides walk out unsure of what was agreed on. Sometimes nothing was agreed on.

But that format drew little scrutiny when advisers were used to primarily boast about the economy’s strength to the news media in the past year. Now, these aides have come under extreme pressure this month as Trump has gyrated in his economic approach and vented his frustration inside the West Wing.

Mnuchin has privately disagreed with key aspects of Trump’s approach to the economy, according to people familiar with the matter. But he has largely disappeared from public view during the turbulent month. Kevin Hassett, a former Council of Economic Advisers chairman and a frequent media commentator, has left the administration.

Stepping into their void is Kudlow, a Reagan administration official and longtime television commentator; senior trade adviser Peter Navarro, an academic with a long history of anti-China positions; and Trump himself, who often undercuts or contradicts his aides, only to reverse himself the next day.

Republicans on Capitol Hill have sensed the White House’s stress and said the goal is to beat back negative public opinion.

“It’s not economic data that’s driving the concern as much as headlines and the stock market having a big drop,” said Rep. Mark Meadows (N.C.), a close Trump ally. “It becomes a headline, then it can become a self-fulfilling prophecy that is not based on any underlying economic fundamentals. There’s a real proactive effort by the White House to try and make sure the economy continues in a robust manner.”

The current economic drama began on the first day of this month, when over the objection of some senior advisers, Trump announced that he would impose tariffs on $300 billion worth of Chinese imports. Just days earlier, the president had signaled that he was ready to back down from his fight with the Chinese, speculating that Beijing wanted to wait until after the 2020 election to negotiate a trade deal.

But a fruitless visit Mnuchin and U.S. Trade Representative Robert E. Lighthizer made to Shanghai infuriated Trump, several people briefed on his reaction said, and he announced the tariffs in a Twitter post shortly after they returned. At the time, senior trade adviser Peter Navarro was the only aide who supported the move.

That announcement began a chaotic chain of economic and political events that White House aides have struggled to control ever since.

The following weekend, China’s currency weakened, a move that would make its exports more competitive, and Chinese officials signaled that they would not be increasing purchases of U.S. farm products, as Trump had demanded.

So on Monday, amid fears that the trade war would spiral out of control, the Dow Jones industrial average fell 767 points. Trump strongly urged Mnuchin to label China a currency manipulator, a symbolic yet harmless shaming that the secretary had resisted because the Treasury Department’s indicators didn’t show that China qualified for such a label. But under pressure, the treasury chief did so shortly after the stock market closed.

Meanwhile, U.S. business executives panicked about the scope of Trump’s new tariffs, and White House officials were bombarded with complaints. So Trump began quietly drawing up plans to delay the tariffs on products such as laptop computers, shoes and clothing. This posed a problem, though.

Trump had insisted for more than a year, without evidence, that China was paying all of the tariffs. This was false, because tariffs are paid by U.S. importers and collected by U.S. Customs and Border Protection. For the first time in months, Trump’s economic message showed signs of cracking. He may have to admit that his economic approach could harm consumers.

So on Aug. 13, Lighthizer’s office issued a news release with little fanfare announcing that tariffs on nearly $160 billion in Chinese imports had been delayed until Dec. 15. Trump would later tell reporters that the intent was to ensure that Americans didn’t pay higher costs during the holidays, one of the first times he had acknowledged that the tariffs raised costs.

“What we’ve done is we’ve delayed it so they won’t be relevant in the Christmas shopping season,” he said at the time.

The stock market rallied amid a sense that Trump was preparing to back down, but economic fears grew deeper the next day.

On Aug. 14, key parts of the U.S. bond market tipped over, creating an “inverted yield curve,” an unusual condition in which investors are rushing to buy ultrasafe long-term assets and that often proceeds a recession. The Dow Jones industrial average fell 800 points.

In the middle of the day, Trump tried to spin the inversion as a positive thing, saying it was a reflection of how attractive U.S. debt was to consumers. But after the stock market closed, his Twitter feed took on a more furious tone.

He cited the “CRAZY INVERTED YIELD CURVE” and blamed a “clueless” Powell from the Fed. 

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Through the week, White House officials became increasingly agitated that the public sentiment about the economy seemed to be tipping. Trump, aides said, is obsessed with media coverage of the economy, and thinks Americans will believe negative news and stop spending money. This exasperation began several months earlier.

“In the last couple of weeks, when the market dipped down, it did strike an amount of fear within the White House,” a White House official said. “There’s been a sense going into 2020 that we can bounce back from virtually everything if the economy stays strong.”

The day after the yield curve inverted, Kudlow said in an interview with The Washington Post that the economy was much stronger and more resilient than people were making it out to be.

“What I see is a pretty good second half coming up,” he said.

Trump, however, kept talking with advisers inside and outside the White House and was getting a mixed picture. Still, White House officials complained that news outlets were elevating negative economic news in a way that discounted the progress the White House had made.

Kellyanne Conway, counselor to the president, said the media coverage of any economic downturn is “way overblown.”

“If it’s not Russia, it’s racism. If it’s not racism, it’s a recession,” she said.

Kudlow took a lead role in the White House’s pushback on Aug. 18, appearing on two television programs to try to quell fears of a recession.

“I don’t see a recession at all,” he said on “Fox News Sunday.” On NBC’s “Meet the Press,” he urged Americans, “Let’s not be afraid of optimism.”

A few hours later, though, Trump stepped on that message. Speaking to reporters in New Jersey before returning to Washington, he said, “The world is in a recession right now,” attempting to draw a contrast with the United States, which is not. 

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By the time Kudlow and Trump made their comments, a freewheeling policy process had taken hold. Some White House officials had begun discussing whether to slash payroll tax rates, although a number of senior officials were never told this was under consideration. Americans pay 6.2 percent of their paychecks to fund Social Security, but in the past Congress has temporarily reduced this payment as a way to spur more spending and help the economy in a return.

When The Washington Post reported that the idea was being discussed on Monday afternoon, the White House issued an anonymous statement saying the idea wasn’t “under consideration at this time.” The reason for trying to shoot down the news, two people briefed on the planning said, was a sense that the public would think the White House was panicking if it was revealed that it was contemplating what could be a $100 billion tax cut.

Bad economic news continued. On Monday night, news outlets reported that U.S. Steel could be temporarily laying off up to 200 workers at a Michigan facility. Trump had claimed that his trade policies had revived U.S. Steel around the country, but the company was confronted with lower steel prices and weaker demand than expected.

By Tuesday, Trump was under growing pressure to explain how he was preparing for a possible slowdown.

He said that he was considering a payroll tax cut, as well as the capital gains change for which Kudlow had long advocated. His comments stunned some aides but others shrugged them off, aware that it is nearly impossible to be up to speed on what Trump is thinking at any given moment, even on particular issues such as tax policy. 

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When Trump made the comments, his economic team was scattered. Mnuchin was on vacation, and acting chief of staff Mick Mulvaney was 2,000 miles away at a donor event in Jackson, Wyo.

Mulvaney struck an upbeat but realistic tone about the economy, according to one attendee who was not authorized to speak publicly.

He noted that there were signs of an economic slowdown but argued at length that the fundamentals of the economy are strong. He said if there was a recession, it would be “moderate and short,” according to an attendee who wasn’t authorized to disclose the comments.

When aides presented Trump with the news that the economy could weaken in the next year, it was just one scenario.

White House officials stressed that they still expect the economy to perform very strongly this year, with the gross domestic product growing 3 percent from 2018. Few others are as optimistic. The Fed estimates that GDP will grow just 2.1 percent.

By Wednesday, Trump had reversed himself again. He told reporters before boarding a helicopter that he had decided to rule out any new tax cuts after all.

“We don’t need it,” he said. “We have a strong economy.”

Illustrations by Aaron Steckelberg. Design and development by Lucio Villa.

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