During the Clinton impeachment, the dot com boom was making Americans exuberant about the economy. Today, the economy is slowing, consumer confidence is dipping and corporate America faces a gauntlet of worries including the trade war with China, the future of the North American Free Trade Agreement and slowing growth around the world.
And now investors, consumers and corporate executives face the prospect of a Washington consumed for months by impeachment drama and the uncertain reactions of a volatile president with a penchant for lashing out under stress.
This complex stew could damage an economy already showing signs of flagging. That in turn could further erode Trump’s standing on the economy, up to now his strongest issue.
In 1998, senior Clinton aides took heart that a rocking economy would provide a floor for the president no matter how bad things got. “The president was popular because things were going pretty well and people felt Clinton was working for them,” said Joe Lockhart, an adviser and press secretary under Clinton.
In 2019, that may not be the case.
“Back then you had an economy that was still a couple of years away from the end of the cycle,” said Paul Christopher, head of global market strategy at the Wells Fargo Investment Institute. “We do not think a recession is imminent right now, but we are much further into the cycle now than we were in 1998.”
Trump and his advisers inside and outside the West Wing dismiss all of this and argue that warnings about the economy are dramatically overblown. And they blame the media for hyping signals of weakness and ignoring more positive signs like a strong housing market, wage growth and solid consumer spending.
They also strongly dispute the idea that an impeachment fight will make any difference to the economy, and maintain that the president will continue trying to strike trade deals and cut regulations to ease the path for businesses.
“It’s like the entire media is trying to push us into recession,” said Larry Kudlow, Trump’s top economic adviser. “If you look at the housing data the numbers are much better. I don’t think impeachment, even if they do vote, will have any impact on the economy at all. It doesn’t have anything to do with it.”
Kevin Hassett, who recently departed as chairman of Trump’s Council of Economic Advisers, said data on housing and sales suggest that while third-quarter growth might be slow, the fourth could bounce back close to 4 percent.
Economists and market analysts don’t fully agree with this sanguine view, though many acknowledge the economy retains significant strengths. Here are a few areas where economists say the impeachment saga could make a difference.
Gridlock in Washington
The debt limit is no longer a concern for markets or the economy. Congress lifted it until after the 2020 election. But Trump, the GOP and House Democrats will still have to figure out a way to fund the government after the latest stop-gap runs out in November. An impeachment-fueled shutdown (possibly complicated by another funding fight over a border wall) would not necessarily derail markets, but it wouldn’t help.
The bigger concern is the fate of the U.S.-Mexico-Canada Agreement, the successor to NAFTA. Kudlow and others close to Trump argue if Democrats move to impeach, they will want to show they can still govern at the same time. A good way to do that could be to move forward on the USMCA.
But that’s no lock, given progressives already oppose the deal. Trump has suggested — though not promised — that he might let NAFTA expire if Congress doesn’t approve his new deal. That could be a disaster for integrated North American supply chains and Wall Street.
“There are a lot of big scary monsters out there and that’s certainly one of them,” said Peter Cramer, senior portfolio manager at SLC Management, who is otherwise fairly bullish on the economy, noting that a good deal of economic data has surprised to the upside recently.
People who know the president also worry pressure from impeachment could cause him to lash out in unexpected ways, including by taking an even tougher line with the Chinese, further driving up tariffs that have slammed manufacturers and farmers. Trump could also go the other way, rushing to make a China deal to boost the economy and divert attention from impeachment.
The point is, nobody knows.
“He’ll say he’s not worried about impeachment but obviously he is,” said a former White House official who declined to be identified in order to speak candidly. “Nobody knows what he might do with China or anything else.”
Consumer spending continues to lift the economy even as manufacturing stalls out, keeping growth around 2 percent. That’s well off Trump’s goal of 3-plus percent growth every year but enough to be slightly better than what the economy saw at the end of President Barack Obama’s second term.
Economists’ big fear is what could happen if consumers — already spooked by the trade war — get more skittish during an impeachment saga.
Even before the Ukraine scandal blossomed, consumer confidence as measured by the Conference Board dipped to 125.1 in September from 134.2 in August, the largest drop in nine months. Consumers are increasingly expressing concern about the future path of the economy even if they still say current conditions are good. And it’s starting to show up in tighter purse strings.
Personal consumption in August reported by the Commerce Department on Friday came in lower than expected, rising just 0.1 percent, the smallest gain in six months. That figure — along with weakness in business equipment spending — led forecasting firm Macroeconomic Advisers to drop its estimate of third-quarter GDP growth to just 1.6 percent.
The consumer could always bounce back, especially with low interest rates boosting auto and home sales. “If you look at the housing data, the numbers are much better,” said Kudlow. “I think it could be a turning point. The Fed changing policy has really had an impact.”
But impeachment adds a risk factor.
“This economy has some momentum of its own and trends of its own and those should be largely unaffected by impeachment,” said Christopher, of Wells Fargo. “But it’s another log people have to throw on the pile of worries. We are particularly concerned that the consumer outlook is weakening at the same time that the view on the current situation is weakening. And many job seekers are already picking up that job growth is slowing.”
Corporate investment spiked immediately after the Trump tax cut passed in 2017. But it’s gone flat again since, a significant disappointment for the White House and Republicans counting on spending on new factories and equipment to boost economic growth back up to 3 percent or better.
Kudlow and other conservative economists note that so called cap-ex, for capital expenditures, could still bounce back. Industrial production rose 0.6 percent in August, according to the Fed, beating expectations. But the GDP report for the second quarter showed business investment declined 1 percent over the last year. Some of the decline in investment appears to reflect concern about the trade war with China and the future of NAFTA. Capacity utilization at American manufacturers ran at 75.7 percent in August, below its long-run average. That means companies don’t need to rush to build new plants if they aren’t using all their existing capacity.
Impeachment and how it might impact the 2020 race just adds another level of concern when making big decisions on corporate investment. “It’s not just Trump’s fault here,” said the former administration official. “It’s also the fear of Elizabeth Warren as the Democratic nominee. If you have this much uncertainty, why would you start a big capital expenditure plan today? You wouldn’t. It would be crazy.”