President Donald Trump faces a number of major decisions on trade and the budget in the coming months just as the US economy faces the biggest head winds of his tenure, forcing him to decide whether to recalibrate as recession fears mount for next year.
Trump has threatened to escalate trade conflicts with China, Mexico, the European Union and Japan, spooking business leaders and leading some to pull back investment. Similarly, budget and debt-ceiling talks with congressional leaders from both parties have sputtered, raising the possibility of another government shutdown in October.
The uncertainty - and a cooling global economy - led JPMorgan Chase on Monday to predict that there was a 45 per cent chance the US economy would enter a recession in the next year, up from 20 per cent at the beginning of 2018.
Also Monday, a key gauge of New York's manufacturing industry notched the biggest one-month drop ever recorded. It was the latest sign that after a relatively strong economy last year, political and economic forces appear to have combined this year in a way that has darkened the economic outlook. This could be problematic for Trump, who has tried to tout the economy's performance as key to his reelection.
"The key question is: Can you have a smooth landing for the economy?" said Vincent Reinhart, chief economist for Mellon and a former Federal Reserve economist. "We're going through a slowdown and nobody likes it. It doesn't feel good."
The economy's softening and uncertainty around Trump's next actions are causing a delicate situation for the Fed, which is meeting Tuesday and Wednesday. Trump is relying on the central bank to cut interest rates to boost economic growth. But Fed officials are trying to reconcile worrisome reports about the economy with other areas of relative strength, particularly the low unemployment rate and high levels of consumer spending.
At the same time, Trump has it within his power to reduce risks to the economy - on the budget and trade.
Lawmakers are working to craft a budget deal that could avoid a shutdown in the fall, raise the federal debt limit and prevent deep spending cuts. But so far even Republicans have struggled to come to an agreement with the White House, which would be a prelude to a broader negotiation with Democrats. Similar efforts at the beginning of the year ended in the longest government shutdown on record after Trump demanded funding for his border wall.
Another government shutdown, flirting with a breach of the federal debt limit and deep spending cuts would all hit the economy.
Similarly on trade, White House officials, Republican leaders and business executives have said that if the spats are resolved soon, that could lift the economy heading into 2020. But so far most of the negotiations are either unresolved or stalled, with uncertainty even over whether Trump will meet with Chinese President Xi Jinping at the Group of 20 meeting next week.
"The biggest self-inflicted risk to growth today would be trade going south," JPMorgan chief executive Jamie Dimon told reporters last week.
The president has taken complete ownership of the economy's performance, calling it the "Trump economy." During the first year of his presidency, his top economic advisers engaged in rigorous debate about how to shape policy, and Trump hesitated to take actions that would harm growth.
But over the past year, his team has become largely deferential to Trump's instincts, particularly on trade, and Trump has been willing to entertain tariffs and government shutdowns in hopes of achieving other policy objectives even if they posed risks to the economy.
On Saturday, Trump discounted the concerns and said the economy's performance was historic and just getting started. He warned of a downturn if he loses next year. He often refers to the economy setting records but rarely specifies to which records he is referring.
"The Trump Economy is setting records, and has a long way up to go," he wrote on Twitter. "However, if anyone but me takes over in 2020 (I know the competition very well), there will be a Market Crash the likes of which has not been seen before! KEEP AMERICA GREAT."
Next month the economy will notch the longest expansion in US history, growing for more than a decade since the Great Recession officially ended in 2009. Trump boosted growth with tax cuts, higher levels of government spending and more deregulation, but Democrats have charged that some of these changes amounted to a "sugar high" that will wear off and ultimately damage the economy.
There are numerous signs that the economy's strength last year might prove short-lived.
Manufacturing indexes have fallen to the lowest levels of Trump's presidency, reflecting weaker demand and fears that Trump's adversarial approach to trade is leading companies at home and abroad to pull back on spending.
Amid signs that some manufacturers are pulling back, Trump has gone on the attack. He has lashed out at several iconic companies, including Harley-Davidson and General Motors, over announcements of cutting domestic jobs, and he said last week he was pushing Lockheed Martin not to curb production at a helicopter plant in Pennsylvania.
Trump has tried to point to individual companies that he sees are cutting jobs, but the impact of these threats is unclear. Businesses cut back on capital investment in the first three months of the year even though they continued to benefit from sweeping tax cuts at the end of 2017.
The Morgan Stanley Business Conditions Index recorded its largest one-month drop on record in June and is now at its lowest level since December 2008, when the US economy was in the middle of a recession.
"We see this underlying deterioration. It's been a slow bleed," said Lindsey Piegza, chief economist at Stifel Fixed Income. Piegza has been especially alarmed by slowing private domestic sales, an indication that US demand is likely weakening.
Analysts and White House officials, however, have stressed that there are still numerous bright spots in the economy and have cautioned against overreacting to a few blips in the data.
"Trump has deeply held convictions on trade. A few short-term data points aren't going to change his mind," said one senior official who spoke on the condition of anonymity because they were not authorised to speak publicly.
About 70 per cent of the US economy is driven by consumer spending and consumer confidence remains strong, with retail spending jumping in April and May. Inflation remains low, and wages have been growing fastest for working-class Americans.
The US economy added just 75,000 jobs in May, many fewer than expected, but the unemployment rate is 3.6 per cent. White House officials believe wages and consumer spending will help lift the economy despite other factors even if businesses continue to pull back investing.
"In the end, you have to judge whether the data are making sense," Kevin Hassett, chairman of the White House Council of Economic Advisers, said in an interview. "The thing that makes sense to me is we get saved from the slowdown by the consumer right now because income growth has been so high."
Trump and business leaders are both looking to the Fed for a possible lift. The stock market has rebounded in recent weeks, largely based on investor belief that the Fed will step in to counter any widespread harm from the tariffs.
Wall Street is forecasting an 85 per cent chance of a rate cut in July and will be watching Ffor signs he is ready to act soon. ed Chair Jerome Powell's news conference closely Wednesday
"The Fed is going to try to act sooner rather than later. If they wait too long, it will be much more difficult to get out of trouble," said Andrew Levin, a former Fed economist who now teaches at Dartmouth.
The biggest concern, however, remains how Trump plans to resolve the escalating trade fight with China. Trump has imposed tariffs on US$250 billion ($384.7b) in Chinese imports and threatened to penalise an additional US$300b in imports if China doesn't agree to major concessions. Talks with China began last year and continued for months before unraveling in May. Trump has said that if Xi doesn't meet with him next week during the G-20 summit in Japan, the United States would be prepared to move forward with new tariffs.
"The economy is not close to a recession this year, but next year is a lot more problematic," said Greg Valliere, chief US policy strategist at AGF Investments who writes a daily political newsletter. "If we go into 2020 with no China deal, that's going to be a significant negative for him in terms of business uncertainty, farmer uncertainty, weaker economic growth and maybe even a little touch of inflation."
More than 320 companies and industry groups are testifying at the United States Trade Representative's office this week and next about their fears that imposing tariffs on all Chinese imports will cause significant price increase, job losses and profits to shrink. But inside the White House, some advisers point out that hundreds of thousands of companies were not bothered enough to testify or even submit comments about the tariffs.
The US economy grew 2.9 per cent in 2018, the highest level since 2015, according to the Commerce Department. White House officials have predicted growth will be even stronger this year, but few others concur. The economy grew 3.1 per cent in the first three months, but a number of analysts predict it will grow less than 2 per cent between April 1 and the end of September.
Trump has shown no sides of backing down, particularly in his trade fight with China or in his budget impasse with Democrats and Republicans on Capitol Hill. But he has also shown a penchant for pivoting sharply when confronted by bad polls or a stock market dip, numbers that he watches closely.
"The White House doesn't need to panic, but there are reasons to be nervous," said Douglas Holtz-Eakin, an economist who advised Sen. John McCain, R-Ariz., during his 2008 presidential run. "We were always going to slow down from 3 per cent growth. The question is, to what? If we slow down to 2.5 per cent, that's a huge victory. If we slow down to 1.5 per cent, that's a much tougher reelection sell."