Presidential elections usually turn on a few, simple macro-issues. While daily campaign brush-fires and controversies get clicks and sell papers, most elections can be predicted with the answers to two simple questions. Do people feel safe? Are they worried about their economic future?
We know the answer to the first question, as terrorism and national security have recently spiked to be the voters’ top concerns in the election ahead. Based on events coming into focus now, we can start to predict how voters will feel about the second question when they cast their ballots. The very weak economic growth that has marked the Obama tenure is about to be flipped upside down.
Answers to both questions are about to become extremely toxic for Democrats, who have occupied the White House for the last 7+ years. The Clinton political legacy was launched with a simple observation that “it’s the economy, stupid” when it comes to Presidential elections. It is very likely the economy will provide the coda for the Clinton machine.
On the first day of trading in the new year, the Chinese Shanghai Index fell 7 percent, sparking losses in financial markets around the world. While the Chinese government is likely to intervene to prop up its stock market, the sell-off is due to more fundamental forces.
On Monday, a private economic survey reported that Chinese industrial output had contracted for the tenth quarter in a row. The Caixin/Markit survey of manufacturing purchasing managers came in lower than expected and at a level that indicated the Chinese manufacturing sector was contracting. Official government estimates were slightly higher, but still registered contraction of the industrial sector.
Economic analyst Tony Nash, appearing on Breitbart Daily Monday, said China was in an “industrial recession” and plagued with “overcapacity” in its manufacturing sector. As Nash noted, China has been the source of most economic growth around the globe since the Great Recession. There is increasing concern that without China’s economic growth engine, economies around the world will tip into recession.
Another report on Monday added to those concerns. Exports from South Korea fell 13.8 percent in December from the year before. This was much worse than economists expected and a steeper decline than registered just the month before in November. Declines in exports from South Korea were felt in every region, with the drop-off to China being the worst.
South Korean exports are often called the “canary in the coal mine” of the world economy, because the nation is the source of so many products consumed around the world. The dramatic drop in exports from South Korea, which obviously are imports everywhere else, shows a steep drop in demand around the world.
In the coming weeks, American companies will report earnings for the fourth Quarter. The latest estimate is for earnings across the economy to fall by 4.7 percent in the quarter. This will mark the third consecutive quarterly decline in earnings, i.e. profits. The last time American companies had such a bad stretch of earnings was at the tail end of the Great Recession.
One could detail a dozen other economic measurements that point to weakness in the economy, but most of it is academic in an environment of declining world demand and falling profits for U.S. companies. Add in uncertainty in the Middle East and a credit crunch tied to volatility in the oil markets and it is hard to see how the U.S. economy can sustain its already anemic growth.
Overlaying all of this, of course, is that fact that the Federal Reserve is now in a period of tightening the money supply. When the Fed increased its discount rate in December, it also indicated that it planned up to 4 additional rate hikes in 2016.
Whatever economic growth has existed in the American economy has been inexorably linked to a zero-interest rate environment. The seven year period of essentially free money has expanded credit in financial markets, juiced corporate profits and fueled price inflation in markets and several baskets of assets.
The Fed is ending its money party at exactly the same time the economy around the world is showing considerable weakness. If economies were already slowing down while money was free, what happens to the economy when money becomes more expensive?
There was a time that the consequences of bad policy decisions weren’t felt for many years into the future. As with everything else in our world, the pace of change has quickened. The Middle East is descending into chaos largely as the result of policy decisions made by the Obama Administration.
Of course there are proximate causes that date back decades, but different choices made just a few years, or even months ago, would likely have produced a more stable environment than we witness today.
The same is true of the economy. At the dawn of the Great Recession, rather than let the market sort out the winners and losers, the government stepped in to be the final arbiter. Between Congress and the Federal Reserve, the government pumped trillions of stimulus into the economy hopping to lift the world out of its recession.
It worked, for a bit, on paper. Those policy decisions are now coming due, however. National security and terrorism may dominate the political discussion today, but, very soon, the economy will shoot back to the top of the issue agenda for voters.
It is very likely that when voters step into the voting booth in November, they won’t feel safe and they will be terrified of their economic future. The Democrats may be doomed before the campaign even gets underway.