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Trump's Economy Next Year Won't Be Much Better Than Obama's Was

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President Donald Trump’s biggest success has been the economy. But trade wars, rising interest rates, and the wearing off of fiscal effects is expected to bring Trump’s economic boom down a peg, and not much better than his predecessor’s two years prior. Photographer: Andrew Harrer/Bloomberg

This is really as good as it gets for the U.S. economy. It’s all downhill from here.

Not that downhill means lower incomes and a recession.

It just means that 2019 is going to look more like 2016 in terms of growth rates.

President Trump likes to boast about the U.S. economy growing over 4%. But that is based on quarterly growth rates compared with the previous year. On an annualized basis, the U.S. economy isn’t all that much better than it was in 2014 and 2015, when GDP came in at 2.4% and 2.6%, respectively. This year’s growth rate will hit somewhere between 2.8% and 3%, thanks to tax cuts and other fiscal stimulus. But next year, if BNP Paribas’s calculations are correct, U.S. GDP slows to 1.8%, which is not a heck of a lot better than President Obama’s last year in office, when GDP ended the year up 1.6%.

Most economists have pegged next year’s GDP at more than 2.2%, but trade wars and the wearing-off of fiscal stimulus are toning down Trump’s economic miracle.

“Downside risks are likely to remain a key focus over the months ahead,” says Robert McAdie, global head of strategy research for BNP Paribas in London. Its GDP forecast of Trump barely beating Obama is below market consensus.

“Global economic growth looks more challenging for 2019 than 2018,” McAdie says, citing “fading tailwinds” and the China-U.S. trade war.

BNP lowered its growth forecast for both the U.S. and China by 0.2 percentage points. The close shave on both economic superpowers means global growth of around 3.4% next year, down from 3.6% in this year’s forecast.

The prospect for a more challenging year ahead has not been fully appreciated yet by most investors. Wall Street is generally upbeat about low taxes and a peak dollar, and believe China and the U.S. will eventually work things out.

But McAdie and others at BNP Paribas wrote in a report to clients on Wednesday that investors should be prepared to get defensive. A growth slowdown will be the theme for 2019, even though the economy will still be in growth mode.

Jerome Powell, chairman of the Federal Reserve. The Fed is the bigger wet blanket in 2019. Photographer: Andrew Harrer/Bloomberg

It’s worth noting that the coming slowdown has more to do with Jerome Powell than trade tariffs. Global monetary tightening is expected to be a larger headwind next year as the Fed raises rates again and winds down more of its balance sheet alongside the Bank of Japan and the European Central Bank.

Those three central banks have been propping up security markets since at least 2009. The Fed was the first to do so.

The strength in the dollar index due to higher Treasury yields could become troublesome in the near-term. A stronger dollar makes U.S. exports less competitive and exacerbates an already enormous trade gap with China. Trump could up the ante by blaming other countries and go after them next.

The Fed may be the wet blanket in 2019, but that is assuming Trump doesn’t slap China with tariffs on everything it sells to the United States. Some of those goods are made for American companies shipping to consumers back home.

“We expect more protectionism in U.S.-China trade,” says Mike Gapen, an economist for Barclays Capital in New York.

Protectionism is often associated with lower employment as job gains in protected industries like steel are offset by losses elsewhere. A 0.2% decline in U.S. GDP equates to about 250,000 jobs, according to Barclays, which estimates that a higher 0.4% GDP drop in China could yield similar losses. Whether growth declines are associated with permanently lower employment in a certain sector depends on the relationship between changes in trade volumes, rates of productivity growth, and labor participation rates.

“Trump needs to change his attitude or the U.S. will become the biggest loser of this trade war,” says Naeem Aslam, chief market strategist for ThinkMarkets and a Forbes contributor. “I think that we are moving fast toward a moment when the U.S. loses control as other countries gain a stronger position from working together (against the U.S.).

Trade war outcomes are just educated guesses at this point. Worst-case prognostications have become a favorite past time of Trump haters on social media.

But for those assuming the worst from trade tariffs, a hawkish Fed and tighter liquidity in Europe and Japan added to the mix make it easy to forecast lower global growth. Whether it slows to Obama levels depends on the Fed, Trump and Xi Jinping.

Happy times. A trader reacts on the floor of the New York Stock Exchange in New York, U.S., on Friday, Aug. 31, 2018. Wall Street still largely likes what this president has done with the economy: deregulate and cut taxes. Photographer: Michael Nagle/Bloomberg

Take one look at the stock market and it is easy to think the U.S. is unstoppable. Trump seems to think so. He recently joked in a jab to Obama that he has found his “magic wand,” a reference to Obama’s comment about Trump needing a magic wand to bring certain manufacturing jobs back to the States.

In financial markets, there has been a disconnect between the performance of the U.S. stock market and other markets. The Nasdaq is up 15% this year, while the MSCI Asia-Pacific is having its longest sell-off in 16 years. The Shanghai Composite index is now at a four-year low, and down some 25% from the January high point. Some European equity markets are experiencing corrections of a lesser degree but are still money losers this year. Germany’s DAX index is down 12%, reflecting trade tensions with the U.S. The FTSE 100 index is down 8% from its high in May.

Trump’s America is doing well based on nearly every business and consumer sentiment index out there.

Despite his low approval numbers, he is rewriting the rules of trade at the only time possible—in the middle of a bull market, the longest bull market in history.

But as BNP Paribas warned this week, there are “hazards ahead.”

The IMF’s Christine Lagarde stepped up her warnings recently about how the escalating U.S.-China trade war could deliver a shock to poorer economies. Trump is set to whack China with another $200 billion in tariffs.

If Trump’s GDP does fall to near-Obama levels, it would be a big blow to his view of his presidency, a presidency which he has graded A+.

For the president, the economy is booming thanks to his policies. Nearly everyone in the market would agree with him. But this economic recovery has been in place long before Trump came to town. While few believe that it was Obama’s economic policies that kept the U.S. growing post Great Recession (Wall Street knows it was the Fed), Trump’s argument that his economy policy has been better for growth than Obama’s starts to look weaker next year. Political commentators won’t care about business cycles. They will use a 1.8% growth rate, if BNP is right, as yet another example of Trump’s exaggerated claims, a year before the 2020 elections.

BNP’s 1.8% GDP is not written in stone.

“The growth risk is a more protracted trade war involving the EU and Japan,” says Neil MacKinnon, an economist for VTB Capital in London. “That would derail the global economy and puncture the performance of U.S. equities, already historically overvalued,” he says.

In other words, if BNP is right, and the trade wars get worse, a bear market in equities goes global rather than spotty if Trump’s economy doesn’t beat Obama’s next year.

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Economy

Economy and environment go hand-in-hand, says natural resources minister

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KITIMAT, B.C. — Canada’s natural resources minister says the environment and the economy go hand-in-hand after he toured the site of a new liquefied natural gas venture in British Columbia, days after the United Nations warned more needs to be done to cut greenhouse gas emissions.

Amarjeet Sohi said Wednesday the government is showing leadership on climate change to meet the requirements of the 2015 Paris climate change agreement by putting a price on pollution, encouraging more investment in renewable energy and bringing in better regulations to reduce emissions.

“We feel that oil and gas will remain a source of energy for the foreseeable future and it is very important that Canada is expanding its non-U.S. global markets to continue to create jobs that Canadians deserve,” he said in an interview after touring the LNG Canada facility.

While the government must take action to reduce the impact of climate change, he said it also has a responsibility to reduce the country’s dependency on “one single customer” for oil and gas: the United States.

The tour of the LNG Canada joint venture in Kitimat comes after a United Nations Intergovernmental Panel on Climate Change said there will be irreversible changes and the entire loss of some ecosystems if the world doesn’t take immediate and intensive action to cut greenhouse gas emissions far more than is occurring now.

Canada will have to cut its emissions almost in half over the next 12 years to meet the stiffer targets that dozens of international climate change experts say is required to prevent catastrophic results from global warming.

Sohi said a Scotiabank report earlier this year concluded that delayed oil pipeline construction is causing a steep discount for Canadian crude, which is costing the economy about $15.6 billion a year.

That revenue can be used, among other things, to transition towards a cleaner and greener economy, he said.

The $40 billion LNG project that’s planned for Kitimat and a 670-kilometre pipeline delivering natural gas from the northeast corner of the province has been criticized for increasing Canada’s greenhouse gas emissions.

The LNG pipeline will not only be a clean source of fuel, but it also helps Canada be a world leader in clean fuels, Sohi said.

“It will produce the least amount of emissions and the world needs natural gas. We can be a clean source of that and help countries, such as Japan, China and India and others, that rely so heavily on coal and diesel to get off coal and diesel and reduce their emissions,” he said. “We can help make a difference in the world by supplying natural gas and replacing more polluting carbon-based sources of energy.”

A Senate banking committee had called for an urgent revamp of Canada’s tax and regulatory system
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Tweed, Solei and Liiv are among the companies that have been producing various strains of pot for the market

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Economy

How to make the economy great again: raise pay

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Raising pay works.

Trucking industry players have been complaining for a few years about an acute shortage of labor in their industry, as demand for trucks rises but people resist launching a career in a somewhat unpleasant, low-prestige industry that has a hazy cloud of disruption by automation hanging over it.

So just recently, J.B. Hunt, the biggest trucking company around, announced that it did something radical — raised pay 10 percent — and the company says it’s working.

That’s going to be grist for the mill of those who think the very idea of a labor shortage is incoherent. But I think it’s worth actually spelling out. It’s easy to imagine a situation where your company has enough customer demand that it would be profitable to add some additional workers at your current pay level (to keep longer hours, say), but it would not be profitable to add additional workers if the price of adding them was an across-the-board pay increase.

There’s a real sense in which that’s a shortage.

But the solution is what we just saw from Hunt. Someone has to go ahead and do it anyway. That could mean accepting lower profit margins as the price you have to pay to increase sales and grow the business over the long run. It could mean charging higher prices. Either way, what it means is that the most aggressive, highest-productivity firms are going to grow and the others will lose workers and die.

A strong economy is a beautiful thing. But it isn’t literally good for every single person. In particular, while J.B. Hunt seems to be doing well with booming demand for truckers, some lesser trucking companies may be undone by higher wage demands. Full employment doesn’t necessarily serve the interests of the entire business class.

A signature aspect of the prolonged Great Recession is the degree to which it discredited capitalism in American society. The obvious example of that is debt-burdened college graduates who flocked to Bernie Sanders and “socialism.”

But a more striking example is the small army of business executives who spent years whining about a “skills gap” and calling for more government programs to change workers.

If you think about that for a second, you’ll see that the idea that a bunch of Labor Department bureaucrats can effectively train marginal workers to perform valuable work in the modern economy involves a nearly utopian level of faith in the state. The right answer to this problem is, obviously, that private businesses should hire underqualified workers to save money and then train them.

It’s not that private business executives are geniuses and government bureaucrats are dolts. But the nature of market competition is companies that are bad at training will just be bleeding money and will stop, while companies that are good at it will gain a competitive edge.

The problem, obviously, is that from late 2000 through to this spring, the labor market fluctuated between “generationally awful” and “kinda weak.”

In an economy like that, having worker training as an organizational competence doesn’t pay off, and companies’ ability to do it naturally atrophies. But that will start to change. J.B. Hunt is handing out raises to attract and retain truck drivers. Some other company may find that it can undercut them on pay by hiring inexperienced workers and training them.

There are plenty of problems that market competition can’t solve, but there are actually quite a lot of problems that it really can address. You just need a strong labor market to make the good stuff happen.

This is why even though nobody wants to agree with President Trump, I think he’s basically right to urge the Fed to show more patience with the interest rate increases. The process of getting the economy working again, with big employers retooling to be prepared to either pay higher wages or invest in training, has huge upsides, but it’s only going to happen under pressure.

This is an abbreviated web version of The Weeds newsletter, a limited-run newsletter through Election Day, that dissects what’s really at stake in the 2018 midterms. Sign up to get the full Weeds newsletter from Matt Yglesias, plus more charts, tweets, and email-only content.

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Fighting climate change won't destroy the economy

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During an interview with the Associated Press on Tuesday, President Trump was asked about climate change. He responded with a digression about the intensity of hurricanes but fell back on a familiar talking point about the economy, saying that “what I’m not willing to do is sacrifice the economic well-being of our country for something that nobody really knows.”

It echoed comments he made Sunday on 60 Minutes about climate change. “I don’t want to give trillions and trillions of dollars. I don’t want to lose millions and millions of jobs. I don’t want to be put at a disadvantage,” he said.

The remarks came shortly after Hurricane Michael tore through Florida and as an international panel of scientists warned that the world may have as little as 12 years to act to limit global warming to 1.5 degrees Celsius.

When pressed on climate change, Trump and other elected Republicans routinely use the economy as a shield to avoid committing to any policies to slow or adapt to climate change.

Sen. Marco Rubio (R-FL) told CNN that he believes humans contribute to climate change, “but I’m also not going to destroy our economy.” Sen. Ted Cruz (R-TX) made a similar point during a debate with challenger Beto O’Rourke, saying O’Rourke’s concern about climate change is about “the power to control the economy.”

Sen. Mike Rounds (R-SD) said he hadn’t read the new climate report from the Intergovernmental Panel on Climate Change, but also agreed that the economy comes before fighting climate change.

“We ought to be talking about the things that we can do and still maintain a strong economy, because we’re not going to be able to address it unless we keep a strong economy,” he told the Hill.

All these comments are based on the false premise that fighting climate change will come at the expense of jobs, businesses, and growth. As the latest IPCC report showed, the changing climate will be punishing for the global economy, while working to keep warming in check will yield immense financial benefits in the long term.

The planet has already warmed by 1 degree Celsius since the Industrial Revolution, and we’re seeing the consequences now in the form of more frequent and severe heat waves, 8 inches of sea level rise, and more intense rainfall, all of which have cost the United States dearly.

In particular, rising average temperatures have boosted the raw ingredients of extreme weather events, leading them to cause more destruction than they would have otherwise. Hurricane Florence, for example, caused $22 billion in damages. Scientists found the storm dumped 50 percent more rain due to climate change and flooded 11,000 additional homes due to sea level rise. Hurricane Michael is estimated to have led to $10 billion in destruction.

These storms came after 2017, the costliest year on record for natural disasters. Heat waves, droughts, wildfires, and tropical storms, all exacerbated by climate change, cost the US economy at least $306 billion.

And as temperatures rise, so will the tolls. In its latest report, the IPCC estimated that the global economy would take a $54 trillion hit if the world warms by 1.5°C by 2100. That price tag rises $69 trillion if temperatures reach 2°C.

In other words, there’s a huge price tag to doing nothing on climate change.

On the other hand, increasing sustainability by using more renewable energy, curbing greenhouse gas emissions, and becoming more energy-efficient would save the global economy $26 trillion by 2030.

Dirtier sources of energy like coal are already struggling with job losses and bankruptcies. There are about 52,000 workers left in the coal industry. Meanwhile, the renewable energy sector employs more than 800,000 people in the United States.

And those numbers are poised to grow further in the United States: Solar power has surpassed natural gas and wind as the largest source of new energy generation.

We’ve also heard rhetoric similar to Trump’s before about previous efforts to protect the environment. The policies of the Environmental Protection Agency, for example, have long been criticized as a drain on the economy.

Environmental regulations do hurt some sectors while boosting others. However, on balance, they’ve been a huge net benefit to the economy. The EPA’s Clean Air Act, for instance, has saved $22 trillion in health care costs and created a $782 billion market for environmental goods and services.

Some Republicans do recognize that fighting climate change could benefit the economy. Rep. Carlos Curbelo (R-FL) has proposed a carbon tax to regulate greenhouse gas emissions. “Those who choose to ignore it will pay a price. We all will ultimately,” Curbelo told the Washington Examiner.

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