Will Recession Occur Before 2018 Election?

Several of my Democratic friends are absolutely confident they will take back the US Senate and House of Representatives in the November election. Some Republican friends I know are equally depressed over fear of the same thing. I desperately hope the Democrats are right and the Republicans’ fears are realized. Democratic control of Congress would at least bring some measure of accountability to a demagogic Trump. But I am not at all sure either house of Congress will flip.

The current economy is doing relative well, not only in the US but worldwide. American unemployment is at an historic low. Wages continue rising modestly. The Republican tax cut for American workers, however small, is also beginning to show up in paychecks. And a small minority of companies are even publicly announcing bonuses to employees as a result of the corporate tax cuts. Those are indicators most working Americans pay attention to and with which they can identify.

Meanwhile Trump, incompetent as he may be, is a master of marketing and media manipulation. It doesn’t matter what the truth is. He keeps bragging about jobs coming back from overseas, the bonuses for workers resulting from his tax cut, the exploding value of the stock market, and how wonderful all the economic news is because of his leadership. He takes personal credit for everything good that is happening in the US, or anywhere else in the world for that matter. At the same time he does his best to discredit anyone who doesn’t give him all the credit or expresses concern that things might not be quite so rosy.

Most Americans are not familiar with macro-economics in the first place. They are too busy trying to make a living to pay close attention to in-depth financial news and analysis. They just know they are making a little more money this year than last. And Trump continuously claims it is all because of him. That will win a lot of votes from the uninformed.

Trump’s game plan includes sowing seeds of distrust of the free press, our public institutions, and even the judiciary. That will surely help him stay in the spotlight and control or distort the messaging to favor his worldview between now and election day. His incessant drumbeat about fake news continues to influence a sizable swath of American voters. And the biggest factor in his favor for November elections is that time is on his side.

The Administration’s current economic policies will almost certainly cause a significant recession. But right now the national economy is healthy and virtually at full employment; the financial markets are at historically high levels; it is a sellers’ market in housing as a buying frenzy causes prices to rise rapidly before mortgage rates increase; consumer debt is also rising because of increased spending and optimism about a future robust financial picture.

I know conservatives are touting the strength of the US economy and predicting strong growth for the foreseeable future under Trump and the Republicans. But I think they are just parroting the party line and ignoring reality. The current economic situation is almost exactly the scenario we saw in 2006 and 2007 that led to the meltdown in 2008. And the Fed is already beginning to raise interest rates to manage potential future inflation;

With that backdrop, nevertheless, the Administration and Congress passed a substantial tax stimulus which will surely overheat the economy. That is virtually guaranteed to accelerate inflation to an unacceptable level. The Fed will act more aggressively through interest rate increases to counter the inflationary potential. Industry will in turn reduce spending on new plant and equipment because of the higher cost of borrowing. Associated employment and new hiring will decline. The stock market will react badly to the new reality, further fueling economic fears. That will all happen just as the Administration’s new protectionist tariffs and any related trade wars begin to kick in. GDP will decline and we will find ourselves in a substantial recession or worse.

The only question in my mind is when will the recession start and how deep will it be? If it happens before November it could drown out Trump’s political hyperbole, shock voters into facing reality, and make voters clamor for a change of leadership in either or both houses of Congress. The sad part though is that such a meltdown, which I am confident is inevitable, probably will not occur in time for the electorate to realize they have been duped before the 2018 election.

There are always unforeseeable anomalies that might awaken voters in time: Trump’s protectionist tariff impact could develop more rapidly this summer than I expect; Robert Mueller’s investigation could expose substantial obstruction of justice or other criminal behavior by the President before the election. It is also possible, though not likely in my opinion, that enough voters already see the danger of the Trump/Republican governance strategy to swing the mid-terms. But unless that is true, or something dramatic does occur before November, I fear we’ll continue with a Republican majority in both house of Congress and just watch this train wreck further unfold.

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