Trump Tries His Hand at Gambling…Again
As Americans lose unemployment benefits and evictions loom, the White House makes a risky bet
Unless you were sleeping under a rock last week, you probably heard that the country’s Gross Domestic Product (GDP), the chief measure of the country’s economic health, fell off a proverbial cliff during the second quarter of this year. According to the Bureau of Economic Analysis (BEA), during this period, the U.S. economy contracted an eye-popping annualized rate of 32.9%, providing a terrifying snapshot of the economic pain wrought by the pandemic.
This GDP report is by far the worst EVER. Worse than the Great Financial Crisis (GFC). The numbers in the BEA report are also worse than anything seen during the Great Depression. To put last week’s economic carnage into perspective, during the GFC, fourth-quarter GDP fell “only” 8.4%. According to CNBC, last week’s GDP represents the worst economic slump in the previous two hundred years. Yikes.
By the way, can someone remind me why this isn’t a depression?
One of the few positives in last week’s BEA report was current-dollar personal income, which increased by $1.39 trillion in the second quarter, versus an increase of $193.4 billion in the first quarter. While positive, that outcome was due in large part to the trillions of dollars in government assistance poured into the system via the CARES Act and the Fed’s activities.
Also, last week, President Trump said something he may live to regret. During a call last week on the Hannity show, he said this:
“We’re going to have a great year next year. We’re going to have a great third quarter. And the nice thing about the third quarter is that the results are going to come out before the election.” ~President Donald Trump
Indeed, the President makes many statements most of us would immediately regret. But what makes Trump’s comments so strategically perilous is its timing. Amid disastrous GDP numbers, the expiration of unemployment benefits, and the CARES Act eviction moratorium, he’s betting on a V-shape recovery between now and the election.
Even though Trump inherited a recovery that began years before he took office, the economy is his central argument for re-election. With Joe Biden leading in almost every poll, rapid economic growth is probably the only thing that can help his prospects. That’s why he and his campaign hope for a massive bounce in GDP. But they will not have this information until days before the election.
The President is not alone. Unsurprisingly, Larry Kudlow and Peter Navarro, two members of the President’s crack team of economic advisers, share the President’s view. Heck, Morgan Stanley, the Wall Street investment bank, believes we’re in a V-shaped recovery — right now. They’re so confident, the subtitle of their 2020 mid-year economic report is “Embracing a V-shaped Recovery.” Here is the rationale for their assessment:
“First, this hasn’t been a typical recession triggered by bubbles and imbalances; second, unlike the last downturn, the financial system is on firm footing; finally, and perhaps most important, policy support from the world’s largest economies has been decisive, significant and coordinated.” ~Morgan Stanley Midyear Economic Outlook: Embracing a V-Shaped Recovery
I suppose the Trump team can direct their supporters to the title of the Morgan Stanley note to support their economic argument. But as rosy as it is, even the Morgan Stanley report is a problem for Trump.
Here’s why: Morgan Stanley’s mid-June report estimates year on year second-quarter GDP of -8.6%, but the actual number contained in last week’s announcement was a lot worse, coming in at -9.5%. Plus, they don’t expect a return to pre-COVID-19 economic levels until the fourth quarter of this year.
What’s even worse for Trump is that a critical factor in Morgan Stanley’s outlook is the continuation of governmental policy support that is “decisive, significant and coordinated.” Considering that the White House just let millions of Americans fall off the proverbial cliff, those three words do not come to mind.
In June, I wrote about The Dead Cat Bounce, a phenomenon that’s usually related to stocks, involving price rebounds after a dramatic price decline. While sometimes dramatic, the rebound is seldom equal to the initial drop.
After all, this happened with the unemployment figures in May. According to the Bureau of Labor Statistics (BLS), the country added 2.5 million payroll jobs in May, the most substantial increase in jobs ever. But wait — that was after we lost 20 million jobs in April. In other words, a Dead Cat Bounce.
I’m only a guy on an island in North Carolina, not a prominent Wall Street investment bank, but I expect something similar in the third quarter. GDP may indeed set a record, but with COVID-19 outbreaks rising, millions out of work, and a lack of consistent policy, I wouldn’t bet the farm on a V-shaped recovery.
Economic statistics aren’t stocks. But in this upside-down world, I’m throwing the rule book out of the window. If Trump wants to bet all his chips on an economic recovery occurring before the election, he does so at his peril.
