Trump’s trade war triggers recession fears

President Donald Trump could be running a “Morning in America” midterm campaign strategy, bragging about an economy growing as consistently as it has in over a decade with an unemployment rate tied for the lowest level in nearly half a century.

Instead, he’s banking on hard-line trade and immigration policies that could excite his base while undoing economic gains from other Trump policies and nudging the U.S. toward a recession.

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On Monday alone, iconic motorcycle manufacturer Harley-Davidson said it would move some production out of the U.S. in response to Trump’s tariff fight with the European Union while the Dow Jones Industrial Average tumbled over renewed fears from the president’s expected new trade restrictions on China.

It’s all part of a high-risk trade and immigration strategy that has many Republicans, business leaders and even Trump’s former advisers deeply worried about both the politics and the economics of the president’s strategy.

“The economy is doing exactly what we thought and hoped it would do based on what the administration was able to accomplish in tax reform and the deregulatory agenda,” Gary Cohn, Trump’s former National Economic Council director, said in an interview. “Both were aimed at stimulating the economy through growth and job creation. And that’s happened in a very positive way. Anything else that derails or confuses the economic agenda is confusing for the system.”

Confusion is certainly coursing through the system now on both trade and immigration.

Trump’s trade battles with Mexico, Canada, the European Union and China could wind up increasing costs for consumers while destabilizing markets and global supply chains, economists warn. They’ve already left the Dow down for the year despite the strong economy.

Wall Street analysts are now ramping up their warnings of a potential recession given Trump’s aggressive trade moves. “Our calculations suggest that a major trade war would lead to a significant reduction in growth,” Bank of America Merrill Lynch economist Ethan Harris wrote in a recent research note. “A decline in confidence and supply chain disruptions could amplify the trade shock, leading to an outright recession.”

The impact of Trump’s trade moves is starting to show up in economic data. For instance, a survey of manufacturing purchasing managers from IHS Markit — a closely tracked gauge of the factory sector’s health — dipped to a seven-month low of 54.6 last week.

“It is striking that the significant tailwind from corporate tax cuts is now being offset by other forces, most likely the uncertainties associated with the ongoing trade war,” Torsten Slok, chief international economist at Deutsche Bank, wrote in a research note on Monday.

And the market disruption may have much further to run, according to some forecasters. “Markets have not taken trade wars seriously enough, we fear, believing for a long time that President Trump has been bluffing over his intentions as a negotiating tactic, and that other countries would back down,” Paul Mortimer-Lee, chief market economist at BNP Paribas, said in recent note. “It looks like both assumptions may turn out to be too optimistic.”

Trump upped the ante yet again on Friday with threats to impose 20 percent tariffs on all imported automobiles, something the industry itself mostly doesn’t want. He also mocked images of children in cages at the southern border as a result of his immigration policy as “phony stories of sadness and grief.” And threatened cutbacks in legal immigration reportedly coming from the administration later this year that risk adding to pressure on employers who already face difficulty filling open positions.

The president pushed back on the Harley news on Monday. “Surprised that Harley-Davidson, of all companies, would be the first to wave the White Flag,” he tweeted. “I fought hard for them and ultimately they will not pay tariffs selling into the E.U., which has hurt us badly on trade, down $151 Billion. Taxes just a Harley excuse – be patient! #MAGA”

All of this comes against a backdrop that should be a dream scenario for Republicans hoping to limit and perhaps even reverse expected Democratic gains in the November midterms. The U.S. economy has been the envy of the world with strong consumer spending, business confidence, rising wages, low unemployment and low inflation. Many forecasts call for close to 4 percent economic growth in the second quarter and perhaps 3 percent for the full year, a level not hit for a full year since 2005.

The biggest risk to it, many analysts say, is Trump himself.

“I detest using the words ‘sweet spot,’ but we are in a very good place in that we are generating very strong growth and households have more money from the tax stimulus and are enjoying income gains. It’s about as good as we can hope for,” Ellen Zentner, chief economist at Morgan Stanley, said in an interview. “The absolute top risk is trade tension and the potential for trade action and really just the lingering uncertainty over trade that can drive businesses down in terms of investment decisions.”

The immigration crackdown even has some Trump supporters in deeply red states worried.

Pete Wiersma, a dairy farmer from Buhl, Idaho, worries about an upcoming labor shortage.

“Most dairies have more cows than what the family can take care of themselves,” he said in an interview for this week’s edition of the POLITICO Money podcast. “Most of our dairies in Idaho, we are very dependent on foreign-born workers. It’s the engine that makes the machine run. We’ve really noticed a drop-off in applicants.”

Nationwide, business and consumer confidence remain generally high for now. But business groups from the U.S. Chamber of Commerce to the Business Roundtable have warned that trade fights could derail confidence and slow the economy. It’s less about the direct impact of any single Trump tariff than the overall concern about trade disputes potentially spinning out of control.

“The problem is, how many times can you be on the edge of your seat waiting for the shoe to drop,” Goldman Sachs CEO Lloyd Blankfein said at an event in New York last week.

The White House did not respond to a request for comment. White House Council of Economic Advisers Chairman Kevin Hassett told Fox Business Network on Friday that Trump would base his midterm message on the economy and that the trade fights wouldn’t hurt.

“I think that the president is a disrupter, right? He disrupts terrible policies,” he said. “And one of the terrible policies for American workers is that other countries have much higher tariff barriers.”

A Pew research survey out last week suggested Trump’s focus on immigration and trade has GOP interest in the midterms as high as for any midterm dating to 1994, bolstering the president’s view that his political instincts are correct.

Some Republicans, however, are worried about the economic impact of Trump’s actions on trade and immigration as well as on their midterm prospects. Other surveys suggest that while Trump’s base may be strongly with him on both issues, the broader electorate is not, leading to GOP concerns about voters in swing states and swing districts.

A recent Gallup poll found that 75 percent of voters across both parties view more immigration as a good thing. And a POLITICO/Morning Consult poll last month found that 70 percent of Americans want the president to focus on making trade deals while just 14 percent prefer imposing tariffs.

That’s left many Republicans wishing Trump would ditch the harsh immigration and trade policies and focus on the economy and tax cuts.

“Traditionally you would see a level of confidence, economic confidence, that would be good for the majority party,” said David Jolly, a former Republican congressman from swing-state Florida. “In this case the president’s behavior, when it comes to matters of the economy, is very erratic. We’ll see going into November what issues will define the election, but I doubt it will be the economy because even if the president were to try to make the case that it’s the economy, there are just too many other issues confusing voters right now.”

On immigration, some economic conservatives worry that Trump is both potentially alienating swing voters in the midterms with the border separation issue while undermining long-term economic growth with new limits on legal immigration.

POLITICO recently reported that top White House advisers led by Stephen Miller are devising new immigration crackdowns before the election including tightening rules on student visas and exchange programs; limiting visas for temporary agricultural workers; and making it harder for legal immigrants who have applied for welfare programs to obtain residency.

Many economists argue that any efforts to reduce legal immigration will slow the U.S. economy’s growth potential given current demographics showing lower birth rates among the native born and an aging workforce as members of the baby boom generation retire.

The U.S. is currently at 3.8 percent unemployment and government data recently showed more job openings than prospective employees, the first time that’s happened since the Bureau of Labor Statistics started collecting the data two decades ago.

“I always thought the core of Making America Great Again was making the economy great,” said analyst James Pethokoukis of the conservative American Enterprise Institute. “One of the reasons the growth outlook for the future is so low is because of the slowing in labor force growth. That is just a huge headwind.”

“One way to offset that is to make workers more productive and we haven’t figured out how to do that,” he said. “The other is to bring in more people and that is something we know how to do. If they have skills and are entrepreneurial, all the better.”

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