Thank Goodness That's Over -- Or Is It?
The longest partial government shutdown in history is over, with President Trump announcing a temporary deal in the Rose Garden Friday afternoon. But like a good reality TV show host, Trump left the ending in doubt. Is the shutdown over for good, or is this just an intermission before another one starts in three weeks? Will he finally get funding for his promised border wall, or will Nancy Pelosi and the Democrats stand in his way? Could the president invoke a national emergency in order to call out the troops to start laying concrete along the Southern border? Stay tuned for future episodes. (Check your local cable news networks for programming in your area.)
• Economic damage. The fight over $5.7 billion in funding (out of a $4.4 trillion budget) for a border wall may have damaged the U.S. economy to the tune of $12.5 billion (or $130 billion on an annualized basis). That estimate comes from President Trump’s chief economic advisor Kevin Hassett. His methodology: the shutdown subtracted about 0.13 percentage points from growth each week. Thus: about 0.65 percentage points for the duration.
• CBO Estimate:The Congressional Budget Office estimates the damage at a total of $11 billion (Source: https://www.cbo.gov/system/files?file=2019-01/54937-PartialShutdownEffects.pdf), with a reduction in 4th quarter GDP of 0.1 and the 1st quarter of 2019 of 0.2 percent. But the CBO expects most of it to be recovered – except about $3 billion. Put simply, 2019’s GDP will be lower by 0.02 percent.
• Growth forecasts slashed: Citing five weeks’ damage to the economy, J.P. Morgan economists say that the pace of 1Q GDP could be about 1.75%. After a blazing second quarter (4.2%) and solid third quarter (3.4%) last year, that is quite a bit slower, though some slowing was expected.
• Shutdown 2.0? Many economists expect the return to work for federal employees to create a small bounce-back bump in the economy. So the real damage might come if the shutdown were to continue in three weeks. If that happened, Hassett said growth for the quarter could then be close to “zero.”
• Stock market looking beyond the shutdown: Since the financial markets are forward-looking mechanisms, the economic damage of the shutdown has barely registered, with the stock market proving surprisingly resilient (after a rough December). This is, after all, a $20 trillion economy we’re talking about. And our economy is based on the private sector, not the public sector. Having said that, there are plenty of concerns about an economic slowdown quite aside from the shutdown which the stock market will have to digest.
• The long term view: Larry Kudlow put it in perspective (on CNBC on January 22nd) talking about a possible economic hit: “We will get it all back… We’ve been through this before. I acknowledge it’s longer than it’s been sometimes in the past. I lived through a bunch of these in the Reagan years. It also happened in the 90s. There will be virtually an immediate snap back. That is my judgement.”
That’s a good attitude to have as an investor, but not a good one for a politician. (More on that later. See: “Commerce Secretary Wilbur Ross.”)
• If first quarter numbers are lower – no matter what the reason -- we know how this will go. The White House will blame the Democrats – everything was fine until you got to town – and the Dems will blame Trump – see what you did with your shutdown? So politically, a slowing economy works for everybody.
• But it doesn’t work on Main Street, where trust in the government is being tested.
• Fact:Emerson College conducted a poll during the fourth week of the shutdown that showed almost 53% of voters feel the country is headed in the wrong direction, with only 35% liking the direction.
• Fact: In that Emerson poll, 70% believe that national policies need major changes.
• Fact: Consumer Confidence is falling. December was a tough month in the stock market, and it probably took its toll on consumer confidence. And though consumer confidence is a lagging indicator, it’s possible that Main Street’s disappointment in Washington will be reflected in the economy again in the next measurement. The question is whether this may show up in voting in the coming months. After all, the Consumer Confidence Index spiked after Trump’s election.
Consumer Confidence in January 2019
• Bullish outlook:The stock market is all about earnings. Last year corporate America had the benefit of the Trump tax cut, so naturally expectations are lower this year (probably about 4-5% earnings growth for the year). If Trump and the Democrats can work out a solution on border security, that would take away some uncertainty in the markets (and in air travel). If China and the U.S. can work out a deal to avoid the worst of tariffs, that would also be bullish and may help push up earnings. This week the Fed meets, and with a slowing economy, it should hold the line on rate increases.
• Bearish outlook: Trump will declare a national emergency to try to build his wall and political and legal battles will ensue. (This, however, would be discouraged by many Republicans because of unintended consequences. Such as a Democratic president – there will be one again one day – who declares an emergency after a mass shooting and tries to ban the sale of certain weapons.) Because he’s not dealing with the Democrats, nothing else gets through the House either – like fixes to health care and prescription drugs. And if China and the U.S. can’t iron out their differences, exports to China may fall – and not just because China’s economy is slowing.
• Wild card: Nancy Pelosi. The new Speaker had two solid arguments during the shutdown. One, there was no border wall funding for Trump when Republicans had majorities in both houses. And two, Americans blamed Trump (52%-37%, ABC News) for the shutdown. But will Democrats bargain with Trump and the GOP in a reasonable way in the next three weeks, or just be the party of “no”?Will her claims that a border wall is “immoral” stand up to scrutiny when more Americans learn that Democrats have voted to fund walls in the past? Polls shift, and there may be public pressure to give a little – maybe even border wall funding – to get a little – permanent solutions on legal immigration and dreamers.
How to Prevent Another Shutdown
• Last week, Senator Mark Warner (D-VA) introduced the “Stop Stupidity Act.”
• Senator Rob Portman (R-OH) introduced the “End Government Shutdowns Act.” He did it back in 2015. You know, back when a Democrat was in the White House. (Funny how history repeats itself.)
• The gist of both is that if a deal isn’t reached on the budget, the government would automatically be funded at the same levels as the previous fiscal year.(The Portman bill would add the additional pressure of gradually taking away funding in order to give Congress the incentive to agree on a budget.)
Either way, the government wouldn’t shut down. That way, federal workers couldn’t be used as pawns in political battles. After all, you never hear of this happening at the state or local levels, right? Because it doesn’t.
Lessons from the Longest Government Shutdown on Record
• Lesson #1: It’s the end of 1-party rule.
Nancy Pelosi showed that Democrats now control the House of Representatives. Not only that, but Democrats don’t want the same things that Republicans want. That includes a wall, at least not the one Trump wanted.
• Lesson #2: Donald Trump respects real power.
Real power is when the Speaker of the House can forbid you from entering the legislative chambers. Make no mistake, if Trump had tried to give his State of the Union address from the Capitol without permission from Nancy Pelosi, there would have been a confrontation, and Trump would have lost. That’s real power, the kind the Founding Fathers put in place to put checks on an executive, no matter what era or what party.
• Lesson #3: Sometimes real power doesn’t come from politicians.
Air traffic controllers can slow down the entire air system. That’s political AND economic power -- the kind that can affect millions of traveling Americans and the bottom line of firms on Wall Street. And it can make Washington look bad.
• Lesson #4: Mitch McConnell can count to 60.
The Senate Majority Leader knew he couldn’t get enough votes to get funding for Trump’s wall, and McConnell concluded that no matter how long the shutdown went on, that math wasn’t going to change. McConnell’s math skills will come in handy the rest of the year, with other legislation. The 60-vote procedural hurdle will affect many prospective votes. Look for Trump to pressure McConnell to change the rule. He won’t.
• Lesson #5: Don’t be tone deaf.
It’s not new that members of the government are generally better off financially than the average citizen. But when 800,000 federal workers are not getting paid, you still have to show you have an empathy gene.
TSA workers at food bank: Average salary, $42,470 (Bureau of Labor Statistics)
To wit: Commerce Secretary, Wilbur Ross, on CNBC on the 24th.
Ross happens to be worth $700 million according to Forbes. Now, there’s nothing inherently wrong with that – we figure it’s just a matter of time before we get there too. But if you’re going to be part of a government that is keeping workers from getting paid while you engage in political battles, you should at least act like you “feel their pain.” But this interview on CNBC came across as just the opposite:
ANDREW ROSS SORKIN: Mr. Secretary, there are reports there are some federal workers who are going to homeless shelters to get food.
WILBUR ROSS: Well, I know they are and I don't really quite understand why. Because, as I mentioned before, the obligations that they would undertake, say borrowing from a bank or a credit union are in effect federally guaranteed. So the 30 days of pay that some people will be out, there's no real reason why they shouldn't be able to get a loanagainst it and we've seen a number of ads from financial institutions doing that.
• So “let them eat cake” is replaced by “let them get a bridge loan.” That may make sense to a real estate investor between projects, but federal workers are not exactly juggling assets.
• What the media missed: While the media was going off on Secretary Ross about his “let them eat cake” interview, they missed something that could have been a headline. He said this about borrowing money:
“So the 30 days of pay that some people will be out…”
What? This was before the shutdown ended. He was telling the media that the administration was thinking about the shutdown as lasting 30 days – and nobody picked up on it! And a day later, voila! An agreement (though temporary) was made. It wasn’t exactly 30 days, but it was before the beginning of February. He may already have known the shutdown was ending. If only a journalist had asked him about it. “Are you saying that you don’t expect the shutdown to last more than 30 days? Isn’t that where we are now?”
• Lesson #6: The shutdown didn’t work. Trump signed the same deal he could have signed in December. That means that in three weeks we won’t likely see a repeat, but we could see the president try to declare a national emergency to try to get his funding. He will certainly threaten it. He might even impose it, leading to legal challenges and major political battles that play out over the cable networks as well as in courtrooms. Or we could see the Democrats give funding for border security – but not a wall – and Trump will say it’s for a wall anyway. No matter the outcome, the shutdown strategy backfired.
But the biggest lesson from shutdown is this:
It’s no longer the Trump-only GOP
• The significance of the Border Wall Shutdown outcome may not have been a shift of power to Nancy Pelosi and the Democrats – which certainly has occurred to some extent, but the wresting of power back from Donald Trump to career Republicans in the Senate and House.
Trump has a solid 35-40% base that will let him, well, let’s say, shoot somebody on 5th Avenue and get away with it. But that doesn’t get you 60 votes in the Senate, which Mitch McConnell had to tell him on Friday. (McConnell has been reading polls while Trump has been reading tweets.)
• Why it matters to Wall Street and Main Street:How Trump responds to the new realpolitik will dictate what gets done on the rest of his agenda, including fixes to health care and prescription drugs – and border security.
The quandary is that while he’s getting hit from the left with a Democratic House, he’s also getting hit from the right – from Ann Coulter to Lou Dobbs to Laura Ingraham. Et tu, Rush?
Political damage to Trump on the right.
• The president was warned by influential conservative Republicans in Congress that giving in to Democrats on the shutdown would damage his re-election prospects in 2020. North Carolina Rep. Mark Meadows, of the powerful Freedom Caucus, said some members of Trump’s base would be angry and, perhaps unforgiving. In the Senate, it’s worth remembering what Lyndsey Graham of South Carolina—one of Trump’s closet allies—said as the shutdown was getting underway:
"He’s not going to sign a bill that doesn’t have money for the wall...that’s probably the end of his presidency.”
• Wild card: Are conservatives really going to turn on Donald Trumpafter he gave them tax cuts, regulation cuts and conservative judges? When Ann Coulter calls Trump a wimp, and others say he “caved” on border wall funding by ending the shutdown, are they doing the math? Where was the pressure on members of Congress when they had 40 more seats in the House? And wasn’t the whole border wall thing more symbolic than real anyway? (Illegal border apprehensions are down roughly 75% from the peak in 2000.)
• Let’s do the math on Trump and the GOP
What did Republicans want in a candidate, even before Donald Trump came along?
• Tax Cuts -- done
• Regulatory Cuts – done
• Conservative Judges – done
• Repeal and Replace Obamacare – not accomplished
What did Trump want in addition to those?
• Tariffs – GOP, including his own economic advisers, fighting Trump on these
• Breaking of foreign trade agreements – Career staff trying to reassure allies worldwide this is temporary
• Positive relations with Russia – Congress passes sanctions, Trump fails to impose them
• A border wall – still not done
Donald Trump came up with the border wall campaign issue long before other members of the GOP benefitted from it. And now conservatives are acting like he is failing them. It was his idea in the first place!
Outlook: The Right will rally around Trump in the next three weeks and put pressure on Pelosi and the Democrats to do a deal. But Trump has lost at least some of his control on Republicans in Congress.
In fact, more Senators voted for the Democratic bill than the GOP bill last week. That shows a clear chipping away at the power Trump has over his party. And there are Senators and members of the House who are starting to look at the 2020 election as right around the corner. And they’re seeing some trends they can’t ignore.
Indeed, polls that are generally regarded as sympathetic towards the president show erosion in his approval in recent weeks.
• Fox News: 43% approve, 54% disapprove (Jan. 20-22). Month ago: 46% approved, 52% disapproved. This is net drop of five points in one month.
• Rasmussen: 45% approve, 54% disapprove (Jan. 25). Month ago: 49% approved, 50% disapproved. This is net drop of eight points in one month.
• Why it matters to Wall Street:Investors may start watching leaders in the House and Senate to determine coming policy shifts, rather than just trying to read the White House.The Border Wall Shutdown may have been Trump’s biggest misplay to date. But things don’t stop here. There are trade negotiations with China coming up, solutions to health care and prescription drug funding to be addressed, etc. From here on, there will not be a rubber stamp in Congress.
• Bullish outlook:That may be good for Wall Street, which doesn’t mind fights in Washington, as long as they don’t change policy unexpectedly.
• Bearish outlook: Tariffs are still an unknown.
The Weekly Index - Stats and observations that could be predictive.
At the beginning of his term, Trump had a net positive approval in 38 states. Now: 21, per Morning Consult.
Net approval now in key states he won in 2016:
• Florida: -3 (29 electoral votes)
• Ohio: -3 (18)
• Georgia -3 (16)
• North Carolina -3 (15)
• Pennsylvania: -6 (20)
• Arizona: -7 (11)
• Iowa: -10 (6)
• Michigan: -12 (16)
• Wisconsin: -12 (10)
These states gave Trump 141 of the 332 electoral votes he won in 2016. It takes 270 to win.
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