Last week's surprisingly strong GDP report was probably a shocker to many Democrats. Many on the left have been counting on — or perhaps even sotto voce rooting for — a recession that would tank President Trump's re-election chances. Not another economy-shattering financial crisis, of course. The #Resistance doesn't want underwater mortgages or collapsing 401k balances anymore than anyone else. But maybe just enough of a dip to recapture the Rust Belt in 2020. No pain, no gain, America.
And they had reasons! Okay, they might not know what an inverted yield curve is exactly. (It's when long-term interest rates are lower than short-term rates.) But when the infrequent occurrence happened in late March, they probably discovered it's often seen on Wall Street as a recession warning sign. Moreover, the Federal Reserve has been raising rates, historically a leading cause of recessions. Finally, the current lengthy economic expansion — a record 10-years-old if it lasts through July — has to peter out eventually, right?
Maybe not. Expansions don't have automatic expiration dates. Australia hasn't suffered a recession since 1991. Sometimes the good times just keep rolling despite close calls from time to time. Indeed, the American economy might have just avoided a downturn when growth slowed sharply in the second half of last year. "The economy avoided a recession on the back of the mini-financial shock in the final quarter of 2018," according to a research note from RSM economist Joseph Brusuelas.
Instead of further weakening into this year, the economy appears to have accelerated. Sure, you can pick at that 3.2 percent first-quarter number, which was well above the 2.3 percent consensus. Neither household spending nor business investment was particularly strong, but state government spending surged. Weird. And while most Wall Street economists don't think the upturn is sustainable, they also don't think a recession is right around the corner.
So maybe Trump can quit freaking out about the Fed, at least for a bit, although his fears are understandable. The business cycle has always been the most obvious threat to Trump's re-election, given his already low approval ratings. Team Trump knows it's tough to claim you've "made America great again" in the middle of a recession. And it has clearly been concerned one is on the way.
Then again, a continuing strong economy hardly guarantees four more years of Trump. That doesn't seem to be how things really work anymore. Recent research finds the relationship between the economy and presidential approval has weakened in recent decades. Perhaps, as the study "Motivated Reasoning, Public Opinion, and Presidential Approval" suggests, rising polarization means partisan are more likely than ever to view presidents from their party through rose-colored lenses. They're less likely to blame their guy for the bad times, just as the opposition is less likely to give credit for the good times.
Still, it's better to be running during an expansion rather than a contraction. In a recent analysis, the Goldman Sachs economics team argues that the advantage of incumbency plus a slow-but-steady economy offsets Trump's low approval ratings enough to give him a "slim advantage" in 2020.
Even if the economy decelerates to something closer to 2 percent growth from 3 percent, Democrats will still have a difficult economic case to make against Trump. While the presidential Twitter account typically focuses on the broad macro picture, such as the stock market and unemployment rate, a deeper dive shows just how much the long expansion is helping workers. Although the Democratic nominee will surely talk a lot about inequality, wages have been rising fastest for those at the low end, especially given low inflation.
Or look at income growth in key states for the Trump re-election effort. It's up sharply in Pennsylvania and Wisconsin vs. 2016, according to the Commerce Department. So, too, in states such as Colorado, Minnesota, New Hampshire, and Nevada, all recently identified by Trump campaign manager Brad Parscale as potential pickups in 2020.
The Democratic counter is obvious: Thanks, Obama. And that's not a bad argument if the Trump boomlet fades to Obama-era growth rates despite the massive GOP tax cut. A trillion-dollar sugar high and for what?
But Democratic strategists should consider their potential strategy if the demand-driven boomlet of 2018 turns into a 1990s-style productivity boom with many more quarters of 3 percent GDP growth and rising real wages. The Wall Street Journal recently reported that "signs are emerging that the supply side of the economy — the workers and the tools and machines they use to produce goods and services — is becoming energized, improving the chances that faster growth can be sustained."
Maybe give credit to the business tax cuts or long-term trends such as advances in AI. But voters might just keep it simple and credit Trump.