The conflict between President Trump and Congress over border security has influence on consumer confidence and negotiations to resolve the U.S.–China trade spat.
The longest shutdown in U.S. history ended on January 25, after 34 full days. President Trump agreed to reopen the federal government for at least three weeks while negotiations continued over border security, backing down from his initial promises to build a wall. The gridlock surrounding the partial government shutdown was clearly harmful, rippling across the economy. And the failure to negotiate a border-security compromise continues as a political fault line.
The shutdown adversely effected some economic variables, but the majority of the losses will be recouped. The Congressional Budget Office (CBO) published estimates of the cost of the shutdown. While it is hard to be definitive, the CBO estimates that GDP in the fourth quarter of 2018 was about 0.1% lower than anticipated and that first-quarter 2019 GDP will be lower by about 0.2%. The CBO projects that 0.02% of GDP will not be recovered, or about $3 billion in economic loss. Consumer confidence is heavily influenced by the labor market, oil prices, and headlines out of Washington. We can safely say the drop in confidence was partly the result of the government shutdown.
There is plenty of scope for more conflict between the White House and Congress in the coming months.
Debt ceiling looms
There is plenty of scope for more conflict between the White House and Congress in the coming months. Regardless of whether an immediate solution is eventually reached, the debt ceiling will start to bind later in 2019, putting the topic back in the spotlight. We don't expect major changes in the fiscal outlook; tax and spending plans are effectively locked. However, Trump has threatened to shut down the government again. While this doesn't seem very likely, it cannot be dismissed as an empty threat. In January, Trump caved as soon as the Republican consensus in the Senate began to crack, and it's hard to imagine the Senate would want to go through all that again. At the same time, the President's decision-making remains hard to forecast. This has implications for the China trade talks.
Playing by different rules in U.S.–China trade talks
China and the United States, two of the world's largest economies, are headed to the negotiating table again. The deadline for the trade talks is close to the deadline for talks on border security. One can't help wondering how the odds of success on one could affect the odds of success on the other. If Trump fails to secure a border wall, will it push him to a harder line on trade? If he wins on the wall, will it push him to a harder or softer line on trade? We see no change in the underlying dynamics in the trade talks with China; the Chinese appear prepared to buy more U.S. products to narrow the bilateral trade gap.
The Chinese also seem prepared to take a somewhat harder line on intellectual property theft. However, there is no sign of any Chinese willingness to address U.S. Trade Representative Robert Lighthizer's deeper concerns about the openness of China or ways in which capital is allocated across the economy. Any new deal in the coming weeks will likely fall short of what the administration wants. The key question is whether Trump will accept the deal. In a White House with clear decision-making processes, the border wall outcome would have little relevance to U.S.–China trade. However, the Trump White House plays by different rules.
High stakes game
The economic stakes are somewhat greater for the trade conflict than they are for the border wall (which is more symbolic). An agreement with China will clear the air over global trade, while imposing the next round of tariffs will probably add to the difficulties facing global manufacturing. Trade and immigration were key issues in Trump's campaign, and something that can be sold as progress on both fronts is important to the President's re-election campaign.
We do not know how this will play out. Our best guess is that Trump gets a border security deal that falls short of the wall. He could try to pursue the national emergency route, but he will face legal problems. Politically harmed by this, how likely will Trump be to reject the China trade deal that will be on offer? The tone of his tweets seems a little softer; he has said nothing will be finalized until he meets in person with Chinese President Xi Jinping. We anticipate Trump will take the deal Xi offers. This would lift the cloud over the outlook.
Next: The ECB's next step