By Rebeccca Ballhaus and Nick Timiraos
After debating for days whether the U.S. is going into an
economic downturn, Washington policy makers and Wall Street
investors on Wednesday barreled into an even more difficult
problem: There are few good options to deal with one if it
happens.
With short-term interest rates already low, the Federal Reserve
has little room to cut borrowing costs to spur spending and
investment as it usually does in a slowdown. Meantime, the federal
debt is exploding, which could hamstring any efforts to boost
growth with tax cuts or spending increases.
Further complicating matters, Democrats and Republicans strongly
disagree about how best to rev up the economy, with Democrats
favoring higher spending and the GOP wanting lower taxes. Even
within their own ranks there are disagreements about what course to
take.
President Trump on Wednesday backed away from pursuing new tax
cuts, a sharp reversal from a day earlier, when he described
several such measures the White House was contemplating. Mr. Trump
is in the awkward position of calling for economic stimulus at the
same time he says the economy is strong.
"I just don't see any reason to," Mr. Trump told reporters at
the White House when asked if he was contemplating tax cuts. "We
don't need it. We have a strong economy."
He dismissed an idea he floated Tuesday: lowering capital-gains
taxes by indexing investment gains to inflation. "I'm not looking
to do indexing, " he said. "I think it will be perceived, if I do
it, as somewhat elitist...I want tax cuts for the middle class, the
workers." He added that it was an option, but "not something I
love."
On Tuesday, speaking to reporters in the Oval Office, the
president said he had been "thinking about payroll taxes for a long
time" and that indexing was "something I'm thinking about." He
added, "I would love to do something on capital gains."
White House officials, meanwhile, said the administration has
long been examining a range of tax cuts as part of what Republicans
have termed "Tax Cuts 2.0," though no proposals are expected
imminently and such a measure is unlikely to go anywhere in
Congress.
The president also has been pressuring the Federal Reserve to
cut interest rates at a clip typically only seen when the economy
is severely struggling. On Wednesday morning, Mr. Trump compared
Fed Chairman Jerome Powell, his own choice for the post, to a
"golfer who can't putt."
Though unemployment remains exceptionally low, economic growth
and hiring have slowed in recent months and some warning signs are
flashing in bond markets. Most notably, long-term interest rates at
times have dipped below short-term rates, something that has
telegraphed recessions in the past and spooked investors in recent
weeks.
Wednesday's economic reports included some troubling new signs.
U.S. job growth was weaker in the year through March than
previously thought, government economists said. The Labor
Department lowered its estimate of total U.S. employment in March
by 501,000, or 0.3%. That brought down the average monthly increase
in payrolls over the period to about 168,000 from 210,000 -- still
solid but not as robust as once thought.
Other government data revisions in recent weeks also pushed down
estimates of growth and corporate profits.
But it wasn't all bad news: Sales of previously owned homes
picked up in July, the National Association of Realtors said
Wednesday, a sign that lower mortgage rates may be driving sales
after a weak spring selling season. Some retailers also reported
good profit numbers, another sign that households remain a pillar
of the economy.
The Dow Jones Industrial Average rose 240.29 points Wednesday,
or 0.93%, to 26202.73. It had surpassed 27000 in July, when
downturn worries started to concern investors.
Academic research cited by top Fed officials in the past says
that the central bank should move quickly to cut short-term rates
in moments when it has little room to maneuver and the economy
might be heading for a slide.
The Fed's target rate is just over 2%, leaving far less room to
cut aggressively than in the past. But officials at the central
bank aren't yet convinced that drastic action is needed. Moreover,
the Fed's ranks are divided about what steps to take.
Fed minutes from its July 30-31 meeting released Wednesday
showed several officials favored holding rates steady because they
judged "that the real economy continued to be in a good place."
Two of those officials, Boston Fed President Eric Rosengren and
Kansas City Fed President Esther George, dissented from the
decision to cut rates by a quarter percentage point. But two other
officials, not identified in the minutes, favored a more aggressive
half-point cut, which they said would better address "stubbornly
low" inflation.
The minutes also showed the officials believed uncertainty
surrounding the Trump administration's trade policy wasn't likely
to let up anytime soon, creating a "persistent headwind" for the
U.S. economic outlook.
Many business executives have said the uncertain outlook for
U.S. trade policy could be holding back the economy. With the U.S.
locked in sharp disagreements with China over a range of issues,
that might not get resolved soon.
Mr. Powell disappointed some investors -- and the President --
at his news conference after the July meeting when he pushed back
against market expectations of a more vigorous series of rate cuts
to follow.
"Now we know why Powell had a hard time at the press conference.
There wasn't a clear consensus," said Diane Swonk, chief economist
at Grant Thornton.
Washington's appetite for budget deficits could be tested by a
slowdown or recession. Federal spending tends to rise in a
recession because mandatory payments on programs like unemployment
insurance goes up. Meantime, tax receipts tend to slow as household
income growth and business profits slow or decline.
On top of all of that, cutting taxes or increasing spending to
kick-start growth could be a challenge since both can boost
deficits. Federal deficits are projected to grow much more than
expected over the next decade thanks to the two-year budget
agreement lawmakers and the White House struck last month, the
Congressional Budget Office said Wednesday.
The agency boosted its forecast of cumulative deficits over the
next decade by $809 billion, to $12.2 trillion. That means an
additional $12 trillion of debt on top of the $22 trillion already
outstanding.
The increase primarily reflects higher federal spending under
the new budget deal, partly offset by lower projected interest
rates.
The CBO said the new agreement, which increased spending roughly
$320 billion over the next two years above previously enacted
spending caps, will add roughly $1.7 trillion to deficits between
2020 and 2029. That reflects CBO's assumption that federal spending
will continue to grow at the rate of inflation after 2021.
Deficits as a share of gross domestic product are expected to
average 4.7% over the next decade, up from the 4.3% average CBO
projected in May, and a significant increase from the 2.9% average
over the past 50 years.
--Kate Davidson, Josh Mitchell and Alex Leary contributed to
this article.
(END) Dow Jones Newswires
August 21, 2019 22:04 ET (02:04 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.