President Donald Trump will use his State of the Union address Tuesday night to pull out the strongest card in his reelection deck: a U.S. economy that continues to chug along despite impeachment, trade wars and the most bombastic, polarizing president in modern American history.
He’ll have to employ a little sleight of hand when he addresses the nation, given growth hit just 2.3 percent last year — a long way from the president’s promise to expand the economy at a 4 percent pace or more for years to come. He’s yet to hit 3 percent for a full year, though he came close in 2018.
The pace of job creation is slowing a bit, business investment is sluggish and manufacturing just barely slipped into expansion after five straight months of contraction. And the deficit is soaring past $1 trillion per year. In many ways, in fact, Trump’s numbers trail those of his predecessor, President Barack Obama.
And Trump now has to deal with the threat of a frightening virus smacking markets and crimping growth.
Still, Trump is expected to boast of a “great American comeback” on Tuesday night, a clear shift in rhetoric from the “American carnage” he spoke of in his dark inaugural speech in 2017.
To sweeten the pot, Trump is likely to tease promises of new tax cuts aimed at reducing rates on the middle class, looking to make up for some of the shortcomings that made the 2017 tax cut broadly unpopular with the public.
Trump may not get into the weeds on how he’d cut taxes, but people familiar with the speech expect him to pledge middle-class reductions.
And he will likely to take the opportunity to indicate that while he will look to further reduce taxes as a second-term president, his Democratic opponents would jack up tax rates and possibly jeopardize stock market gains that have lifted Americans’ retirement accounts.
In other words, Trump will try to take economic performance that’s average and make it sound like a miracle — while trying to spook voters into thinking a change of course will bring it all crashing down.
“He’s going to talk about increases in household income compared to Obama and the fact that a tight labor market is a big benefit to workers,” said Stephen Moore, a conservative economist who consults with the White House on economic policy. “He’s going to pitch the argument that Democrats are going to raise taxes and he’s going to lower them. He didn’t hit the 3 percent GDP target, so that’s a promise not met. But I don’t think that really matters. The economy is good and people feel it.”
Trump will have to make this economic case without letting on that he’s not delivered on many of his boldest promises.
He did manage to strike a phase one trade deal with China that includes some significant-sounding Chinese concessions. But it also leaves in place hundreds of millions of dollars in tariffs that anger American importers, consumers and farmers. He signed a successor deal to the North American Free Trade Agreement — the agreement he lambasted as the worst in American history.
But the deal is more a slight reordering than a full-scale rewrite. And many of the changes were included in the Trans-Pacific Partnership that Obama negotiated and which included Mexico and Canada as well as multiple Pacific Rim nations.
The TPP was meant as a multilateral challenge to China rather than the unilateral one Trump has pursued to mixed success so far. Trump junked it in one of his first acts in office.
Several analyses of the U.S.-Mexico-Canada Agreement suggest it will actually reduce rather than increase growth in the United States by about 0.12 percent, though it does include higher labor standards that could help American workers.
Trump will be able to boast of an unemployment rate of just 3.5 percent. But the decline follows a clear line — with little deviation — from when the Great Recession ended under Obama in 2009. The economy created a solid 145,000 jobs in December and is expected to turn in a fairly similar number when figures for January come out on Friday.
But the three-month average is now below 200,000, with some economists expecting further deceleration this year as the labor market tightens, businesses continue to hold back on new investment, global growth slows and virus worries rise.
The Trump team still says this is all gloom-saying — and that 2020 could be a real breakout.
“The president will lay out a vision of relentless optimism,” a senior administration official said in a briefing for reporters on the speech. “He will encourage Congress to work with him to continue building an inclusive economy where the least well-off are making some of the fastest gains and where people of every background are finding new opportunities.”
And it’s true, as Trump supporters note, that Obama’s economy was showing signs of slowing when he left office, with GDP growth of 1.9 percent in the fourth quarter of 2016. But overall, Obama had multiple quarters of robust growth, including over half a dozen over 3 percent and several over 4 percent. Obama’s high-water mark came in the third quarter of 2014 when growth raced ahead 5.2 percent. So making the case that Trump has presided over a great American comeback could be challenging.
“We went from an economy that was putting up more jobs per year than it has been under Trump, when he was saying the real unemployment rate was like, 42 percent, to as soon as he took office, saying, ‘Look how low the unemployment rate is!’” said Austan Goolsbee, the University of Chicago professor who served as chair of the White House Council of Economic Advisers under Obama.
“The economy is fine, and it’s been fine for eight to 10 years, the longest boom we’ve ever had. And that’s good. Two-thirds of that was before Trump got there, but he’s going to try and take credit for all of it. Only people who are already for him will really believe it,” Goolsbee said.
Still, despite numbers suggesting the Trump economy is mostly an extension of Obama’s — with an added burst in 2018 after the tax cut — the president may find a receptive audience to his pitch on Tuesday night. Polls indicate the economy remains by far his strongest issue and the one most likely to drive him to a second term despite an approval rating that hovers in the low 40s.
According to a recent New York Times/SurveyMonkey poll, 40 percent of Americans say they are better off than a year ago and just 19 percent say they are worse off, the best numbers in the three years of the survey. And independent voters showed the biggest jump in confidence, according to the Times poll.
It’s not clear voters actually care that much about the big jump in the deficit, which according to the Congressional Budget Office says will hit $1.02 trillion in 2020 after rounds of tax cuts and spending increases — and will keep rising in years to come. Deficits generally shrink in times of low unemployment and moderate growth.
Trump on the campaign trail promised to wipe out the entire national debt in eight years, but as president has shown no concern for mounting red ink.
And Treasury Secretary Steven Mnuchin once again claimed last month that the tax cuts would eventually pay for themselves, though no evidence has emerged to suggest this is true. “We've tracked the numbers and we're right on track," he told CNBC, while highlighting the need for cutting government spending, something the Trump administration has not done.
Business investment — which Trump supporters said would explode after the reduction of the corporate tax rate and other perks — actually contracted from April to December of last year. Decent wage gains and strong consumer demand — along with a decline in imports during the trade war — are keeping GDP numbers afloat. But few economists are predicting blockbuster growth numbers for Trump’s reelection year. Consensus forecasts now call for a growth rate of less than 2 percent this year, well below what the White House is estimating.
Trump’s argument for a second term rests on the idea that whomever the Democrats nominate will deliver a worse economic performance, a case Trump aides say would be made easier if the party selects a nominee like Elizabeth Warren (D-Mass.) or Bernie Sanders (I-Vt.) who have promised big tax increases to pay for dramatically expanded social programs like “Medicare for All.” Even moderates like Joe Biden have repeatedly warned that new taxes on the rich — which generally poll extremely well — will not be enough to pay for these programs.
Trump may not have truly engineered a “great American comeback,” but will sell voters on the idea that the Democratic nominee could preside over economic disaster.
“I think what he can do in the speech is make a big attack against socialism and why this is not the American model and it’s dangerous and it could be really disruptive,” Moore said. “And that’s an especially big opening if Sanders somehow wins.”
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