‘what Is He Doing?’: New Threats Emerge For Trump’s Economy As War Drags On

The guardrails that protected the U.S. economy from President Donald Trump’s policy jolts are wearing thin.

New economic reports show inflation is ticking higher, prompting the Federal Reserve on Wednesday to keep interest rates steady. Hiring has stagnated, wage growth has fallen, and market-based interest rates are climbing amid concern over rising prices, sending mortgage rates up. And with oil now topping $100 a barrel — with no end in sight for the Iran conflict — Trump’s economy only has a thin cushion to rely on if the war in the Middle East starts to rock the economy.

The U.S. is now confronting “inherent fragilities,” said Gregory Daco, EY-Parthenon’s chief economist. The “typical buffers that would prevent any type of external shock — like an oil price shock — from disproportionately affecting the economy are smaller than usual.”

“Downside risks are rising, and this is an extremely fluid situation,” he said.

The data shows that the warning lights were flickering even before Iran shut the Strait of Hormuz, choking global supply chains. Trump — already facing the potential loss of Congress to the Democrats — has struggled to sell voters on how his agenda has benefited them, and that will become a lot harder with rising oil and gas prices poised to limit household spending.

“The thing that underlines every strong economy is consistency and progress, and things that promote confidence, and I just don't see any of those attributes being displayed on a disciplined, routine basis by the White House,” said Chuck Coughlin, a veteran Republican strategist in Arizona who leads the public affairs firm HighGround. "Most of the country is looking at the president, going: ‘What is he doing?’”

Trump this week said oil prices will go down “very, very rapidly” once the conflict ends, but that the security threat posed by Iran is more important than the outlook for oil prices. On Tuesday, White House National Economic Council Director Kevin Hassett said he expects the war will only minimally disrupt the economy if it is extended, but that it would “hurt consumers, and we’d have to think about if that continued, what we would have to do about that.”

“But that’s really the last of our concerns right now,” Hassett told CNBC “We’re confident this thing is going ahead of schedule.”

Trump’s approval rating on the economy has been firmly underwater for months. The latest Economist/YouTube poll found that Americans disapprove of the president’s handling of prices and inflation by a staggering 32-point margin, and a majority hold negative views on the Iran conflict.

Beyond the public’s perceptions, the administration’s outlook on the fighting isn’t resonating with Wall Street either. A survey of global fund managers released by Bank of America on Tuesday found that inflation expectations are rising, and 28 percent of those polled now expect Democrats to retake both houses in the midterm elections — up from 20 percent a month ago. Few anticipate the U.S. will enter a recession, but the prospects are looking dimmer than at the start of the year.

“Until this war happened, everyone thought we were going to have a pretty good growth year,” said Bob Elliott, the co-founder, CEO and CIO of the investment firm Unlimited Funds. “Now it’s pretty clear that growth is going to be soft.”

White House officials contend the economy remains on solid footing. The president’s deregulatory agenda and tax cuts are a tailwind for the expansion. The jobless rate is low by historic standards, private sector payrolls grew over the last year — even with the contraction reported by the Labor Department last month — and wages are still climbing faster than prices. Consumer confidence was improving, as were closely watched surveys that track economic activity in the service and manufacturing sectors.

“President Trump has always been clear about temporary disruptions as a result of Operation Epic Fury, but America’s economic fundamentals and trajectory remain resilient: Real wages are growing, CPI inflation has cooled, productivity growth remains robust, and trillions in investments continue to pour into American manufacturing,” White House spokesperson Kush Desai said in a statement. The president is “taking a whole-of-government approach with our allies to shore up any short-term economic impacts,” he added.

The U.S. is in a much better position to weather the economic fallout than many Asian or European economies. The U.S. is a net exporter of energy, and even if higher oil and gas prices hamper household spending, the effects on the overall economy will be offset by the expansion of domestic production, said Michael Strain, the director of economic policy studies at the American Enterprise Institute.

Oil prices are “a much smaller part of the budgets of businesses and households, a much smaller part of the economy of the whole” compared to previous energy shocks, Strain said. “I think we’re pretty insulated.”

Federal Reserve Chair Jerome Powell on Wednesday noted that the economy has weathered several challenges over the last four years and avoided a slump, but he said the rate of inflation remains above the central bank's target. Price increases linked to Trump's sweeping tariffs are still filtering through the economy, he said, adding that "the oil shock will still [put] some downward pressure on spending and employment and upward pressure on inflation."

And "nobody knows" what will happen next, the Fed chair said. "The economic effects could be bigger, they could be smaller, they could be much smaller or much bigger. We just don’t know. People are writing down something that seems to make sense to them, but have no conviction."

The economic threats become more severe the longer the Hormuz Strait remains closed. The release of global oil reserves, sanctions relief and new political risk insurance for tankers in the region can’t fully offset the scale of the disruption to global supply chains that affect prices and the GDP.

Goldman Sachs dialed up the odds of a U.S. recession in the next year to 25 percent. Other bank analysts are warning the risks to both inflation and growth look more acute now than they did earlier this year, before oil prices started soaring.

The Commerce Department downshifted its GDP estimate for the fourth quarter to reflect a deceleration in consumer spending and exports. Wholesale prices surged in February, the Labor Department reported on Tuesday, and the Federal Reserve Bank of Chicago’s advance estimate of inflation-adjusted retail sales growth for February was negative.

Even setting aside the effects of the Iran conflict, “things look a little bit weaker” than before, Andrew Hollenhorst, the chief U.S. economist at Citi, said before the Fed meeting. Once an oil shock is added to the equation, “it's a really unpleasant combination of data and events.”