5 reasons Donald Trump's presidency will include a recession
Donald Trump begins his reign in the Oval Office on Jan. 20, 2017, inheriting an economy with a seven-year bull market, low inflation and an unemployment rate of less than 5 percent. After an initial election night stumble, the stock market is flirting with record highs. Interest rates remain close to historic lows.
All in all, it's a rosy economy picture. But at some point over the following four years, it's highly likely that the Trump administration will have to cope with an economic recession.
It's a timing issue. Economies run in boom-and-bust cycles, and it's been a long time, relatively speaking, since we had a bust.
The average post-war economic expansion lasts for 58 months, or just less than five years. The Great Recession ended in June 2009, meaning the current expansion is more than seven years old.
By the time Trump assumes office, we'll be 91 months in, and there will be another 48 to go before his first term is over. No post-war expansion has lasted longer than 120 months. It seems unlikely the current one will last 139.
Politics aside, the U.S. is overdue for a recession.
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Uncertainty plus miserable growth equals risk. Trump's win wasn't even official yet and it had begun a series of economic shocks across the world. As the last votes trickled in, Asian stocks fell, the peso dropped 8 percent and Dow Jones futures briefly lost as much as 700 points, though the Dow's losses were soon erased.
Bankrate.com's chief financial analyst, Greg McBride, still believes Trump's victory could send reverberations through the stock market.
"The markets hate uncertainty and a Trump win means a whole lot more uncertainty," McBride says. "I still think we'll see the market pull back 10 percent, which is more than Brexit."
But uncertainty over what kind of a president Trump will be doesn't simply mean higher volatility over the next couple of months. It can actually lead to serious economic hardship.
"We have an economy that is already in a low-earth orbit of slow growth, and when you layer on top of that significant uncertainty that tends to prompt both consumers and businesses to hold back – that's how economic slowdowns and recessions are made," McBride says.
Protectionism. Beyond the specters of uncertainty and timing, there are some very real, glaring issues with the policies that Trump said he would champion as president. Protectionism in particular is arguably the policy that could most easily lead Trump to directly cause a recession.
Trump has repeatedly threatened to start trade wars with overseas partners – most notably China – by assigning large tariffs to foreign-made goods, which he sees as taking away American jobs.
"Forcing manufacturing jobs back to the U.S. will raise the production cost. While it may provide jobs temporarily, the rest of the country will have to subsidize the new job creations by paying higher prices. The rest of the world will not buy the U.S. products due to the higher prices," says K C Ma, professor of finance at Stetson University. "Therefore, protectionism is not sustainable."
In the case of a trade war, American-made products would not only be more expensive due to higher labor costs, but because foreign trade partners would likely impose tariffs on American exports in response, making them more expensive.
The Smoot-Hawley Tariff Act of 1930 is often credited with both contributing to and exacerbating the Great Depression, something most Americans would rather read about than experience.
The elimination of the estate tax would contribute to a long-term deficit. Trump could also help cause a recession by repealing the estate tax, which currently is assessed upon death at a 40 percent rate on estates worth more than $5.45 million.
Trump's policy would replace that with a far smaller revenue stream for the government: capital gains tax on estates more than $10 million – and only when those assets are sold, not upon death.
Aaron Klein, an economics fellow at The Brookings Institution, is worried about this proposal. "In the long-run, deficits do matter," Klein says.
"I'm very concerned about a radical, deficit-financed tax cut that will exacerbate income inequality, create a massive transfer of wealth to elites and fail to stimulate real economic growth," he says. "Repealing the estate tax would be quite a windfall for wealthy families, paid for by my children. And my children's children. I'm very worried about that."
Laissez-faire financial regulation (or lack thereof). Trump has also promised to repeal the Dodd-Frank Act, enacted in 2010 in response to the financial crisis with the intent of preventing another one. It raises capital and lending requirements at banks, and if that goes away – poof! – the conditions that allowed the 2008-2009 global economic meltdown to happen appear once more.
Repealing Dodd-Frank simply re-creates the incentives for large banks to lend to the under-qualified in pursuit of a quick buck. And if their house of cards comes falling down at some point, who cares? The government will bail them out.
That's not the lesson you'd hope the financial crisis would teach our next president.
At the end of the day, any one of these five factors in isolation poses a real chance of bringing on the next recession. The fact that all five exist at once is fairly damning for Trump – and the country – in the next four years.
There's nothing that can be done about the timing issue. The last two presidents both experienced recessions during their first year in office.
But the other four issues are all Trump-specific. If he's not careful, his quest to "make America great again" could take something pretty good – 80 consecutive months of private sector job growth – and turn it into a problem that actually needs fixing.
Copyright 2016 U.S. News & World Report