Trump's re-election now at the mercy of a slowing economy

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The growing odds of a recession before the 2020 election threaten to crush President Donald Trump’s hopes of a second term.

Though still uncertain, such a scenario would be a political gift to Democrats, who have avoided talking about the nearly full employment, record stocks and low inflation so far in the Trump presidency.

Instead, the candidates have highlighted rising income inequality and untenable costs of health care and college to argue that the working class isn’t feeling the boom.

But this week, fears of a broader downturn arose. The S&P 500 sank almost 3% on Wednesday and the Dow Jones Industrial Average plunged 800 points in its worst rout of the year, sparked when the 10-year Treasury rate slid below the two-year for the first time since 2007, a harbinger of a possible downturn.

With a global factory slowdown and Trump’s trade war already weighing on growth, the chances that the U.S. will tip into a recession within the next year have risen to 35%, according to an August survey of economists by Bloomberg News.

“Short of Justices Gorsuch and Kavanaugh disclosing membership in the Communist Party, it is hard to think of any development that could undercut Trump more than a recession,” said Jack Pitney, a professor of government at Claremont McKenna College.

“He promised the religious right that he would give them judges and he promised the rest of his base that he would give them prosperity. Take away prosperity, and he won’t have a prayer,” he said.

At least one Democrat took notice of the signs.

Sen. Elizabeth Warren, who posted a Medium blog in July about the economic slowdown, tweeted Wednesday that “the warning signs for another recession are flashing. We need to pay attention and act now, while we still have time to avert a downturn.”

Government data on jobless claims out Thursday showed the labor market remained healthy last week, though it may be cooling slightly. At the same time, retail sales rose in July by the most in four months, suggesting consumers will help support the economy. But data on manufacturing were mixed.

Economic trends tend to predict election outcomes, and recessions can be kryptonite for the party in power. In the last century, the only elected presidents who lost re-election did so after overseeing a recession – George H.W. Bush in 1992, Jimmy Carter in 1980 and Herbert Hoover in 1932.

For Trump, the economy may be even more important than for his predecessors. His low-40s approval rating is already perilous for an incumbent, and the economy is the main factor keeping him afloat. He scores poorly on most other policy issues and on questions of leadership and character.

“If the economy is what’s holding him at a 43% approval rating, what happens if there is a recession or a stock market retrench going into 2020 or in 2020? If that were to occur, at that point what’s holding him up?” said Joe Trippi, a Democratic strategist and presidential campaign veteran. “There is a danger that the one thing that’s holding him up starts to dissipate. And then he’s in deep trouble.”

In February 1991, Bush’s approval rating in the Gallup poll reached an astounding 89% after the Gulf War. By June 1992, as unemployment was peaking, his approval rating plunged to 38%. Shortly before Election Day, in mid-October 1992, it was 34%. Then he was swept out of power by Democrat Bill Clinton.

The yield on the 10-year Treasury note fell below the 2-year note on Wednesday after the gap gradually shrank over the past two years. An inversion – in which short-term interest rates are higher than long-term rates – is a sign that economic growth is expected to slow.

Before the markets closed, Trump tried to deflect any blame for the economic news by turning it on the Federal Reserve’s interest-rate increases, venting about the “CRAZY INVERTED YIELD CURVE!” in a tweet Wednesday, blaming it on the central bank’s interest rate increases.

On Thursday, Trump told radio station WGIR in New Hampshire that “the economy is phenomenal right now,” but added: “We had a couple of bad days but we’re going to have some very good days.”

A Federal Reserve Bank of New York index based on the yield curve shows the probability of an American recession over the next 12 months is close to its highest level since the financial crisis more than a decade ago.

Still, economists caution that the warning signs don’t mean that a crash is about to hit.

“There’s not a ton of flashing warning signals from a pure economic sense that would suggest a recession is imminent, yet we have all of these other signals — some coming from the markets obviously — that suggest that caution is certainly warranted right now,” said Sam Bullard, senior economist at Wells Fargo.

Trade-policy uncertainty, economic weakness spanning from China to Europe and the tightening of financial conditions could lead to trouble on the horizon, he said.

U.S. factory activity deteriorated in July to an almost three-year low, according to the latest figures from the Institute for Supply Management. In a sign that manufacturing weakness is threatening to spread, the purchasing managers group said its gauge of service providers also dropped to the lowest level since 2016.

Economists worry this weakness will take a toll on what’s been the American economy’s bright spot — the job market.

“The labor market is what hits home the most” for everyday Americans, said Stephen Stanley, chief economist at Amherst Pierpont Securities. “As long as you have a job and you’re confident in your job, you’re probably feeling reasonably good about things.”

Despite the uptick in recession odds, economists still see fairly healthy growth as the U.S. is buoyed by a strong labor market. Weekly jobless claims are arguably a more timely gauge of any change in the state of the job market, and it shows little sign of deterioration. Even with the latest increase, applications continue to hover just above a 49-year low.

Republican strategist Brad Todd signaled that if the economy worsens, Trump allies will highlight what they call a Democratic drift toward “socialism.”

“Swing voters believe lower taxes are better for them and higher taxes are worse for them,” he said. “As Democrats move further toward socialism, that will not help them take advantage of any deterioration in the economy, because anybody in America who’s not a raging liberal believes socialism makes the economy worse.”

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Bloomberg’s Vince Golle and Catarina Saraiva contributed.