There have been signs that the US economy has been slowing for the best part of a year. Poor retail sales in the run up to Christmas did not translate into improved sales in the New Year. Although inventories remained high, sales were sluggish. Manufacturing has been anaemic. Most worryingly, low oil prices have resulted in a crash in the number of operational drilling rigs; causing a slump in a previously booming industry. Nevertheless, the headline employment figure has remained buoyant. So much so that the Federal Reserve has even been considering several interest rate rises.
There were, however, some worrying trends behind the headline employment figure. A large part of the new jobs were going to people who already had jobs. That is, people who were working part time but wanting to work full time have been filling most of the new jobs. More troubling still is the fact that a large number of the jobs have gone to people at or close to retirement age. Worse of all, the types of jobs being created have tended to be low-paid/low skilled, while the jobs being lost have been the high-paid/high-skilled ones.
Now even the headline employment figures have taken a tumble, with just 38,000 new jobs created in May. As Justin Wolfers at the New York Times notes:
“It’s possible that the economy is slowing significantly — that Friday’s jobs report is the canary in the coal mine. Perhaps employment is slowing because of election-related anxiety, or Fed-induced fears of higher interest rates, or concerns about the world economy. Maybe the recovery has run its course.”
There are other warning signs too. The general slowdown in the global economy, together with the recent increase in oil prices – which have forced US fuel and transport prices up – are fuelling inflation. The traditional response to this would be increased interest rates. But last time the Fed tried this (in December last year) the result was the worst New Year stock market opening in history. This raises the possibility of the most feared of all economic climates – stagflation; in which the economy is collapsing even as prices spiral out of control.
Most alarmingly, as Wolfers notes, with the US election season well underway, we are likely to see inaction this side of November:
“Washington is already gripped by election fever, and Congress has decided to punt on just about every major issue until after the election. As a result, fiscal policy will most likely be delayed at least until a new administration takes office in early 2017. And who knows what the priorities of the new president might be?”
That new president could very well be Donald Trump. This is because Hillary Clinton has the most to lose from a failing economy that she helped to preside over as Obama’s Secretary of State. The Clinton narrative was meant to be that the Obama administration had reversed the economic chaos inherited from George W. Bush. As a key member of the Obama administration, Clinton is thus the ‘more of the same’ candidate. Why risk future prosperity gambling on the other guy (who was also meant to be another Washington insider)?
It began to unravel when Clinton was challenged from the left by self-proclaimed socialist Bernie Sanders. Sanders quickly gained the support of a large section of the white working class who have seen their jobs exported and their living standards crushed. Articulating this, Sanders has challenged the narrative that the Obama economy is doing well – for many Americans it isn’t.
Trump emerged from nowhere by articulating the same concerns. Indeed, it is telling that many Sanders supporters say they will vote Trump if Clinton gets the Democratic nomination. So Clinton is caught on the horns of a dilemma. She must continue to appear to be the business as usual candidate while at least acknowledging that all is far from well for a large part of the American workforce. As Charles Gasparino at the New York Post explains:
“The problem facing Hillary as the Obama economy goes south is that she’s looking less and less competent trying to attack and simultaneously defend it.”
The officials at the Federal Reserve are also caught on the horns of this dilemma. Janet Yellen owes her position to Obama; and her best chance of staying put is to see another Democrat in the White House. So she has set about talking up the economy while simultaneously acting as though things are bad – maintaining low interest rates while threatening to raise them.
The very last thing the Clinton campaign team want to see is a downturn in the US economy before November. With Sanders out of the way (not least because of the lack of democracy in the Democratic Party’s “super delegate” votes) Clinton must somehow win an increasingly hard-pressed working class vote back to the Democrats. This was going to be difficult even with a growing economy; and it will depend upon the support of the outgoing President. As Gasparino notes:
“In the end, the price of an Obama endorsement will be voters associating her with his absurd economic theories that produced what the numbers showed us on Friday: an economy and job market that are barely growing and, most worrisome to Hillary, a possible recession.”
If the US economy does crash this side of November, the doors to the White House will be wide open for Trump.