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Trump's stimulus hopes may get frustrated by Congress, 2020 politics

President Donald Trump is presiding over the largest federal deficit ever outside of a recession — which may not block a new stimulus package but is fraught with political risks, according to J.P. Morgan Chase.

The federal deficit is projected to hit a staggering $1 trillion next year — and may even grow if the current slowdown becomes a full-fledged downturn.

Using past recessions in 1990 and 2001 as reference, JP Morgan estimated that a mild recession that nudges up the unemployment rate by roughly 2 percentage points would grow the deficit by 3.6% of gross domestic product.

The deteriorating fiscal outlook comes as fears of a recession stir speculation that a fresh round of fiscal stimulus could arrive ahead of the 2020 election. Last week, reports circulated that the president was weighing a payroll tax cut for workers.

“Although it would not be entirely free of risk, there would be compelling arguments for the federal government to borrow money to provide stimulus, especially in a world of low interest rates and inflation that would likely coincide with a recession,” J.P. Morgan analyst Jesse Edgerton wrote in a research note this week.

However, the Trump administration’s biggest challenges are political, the bank said, as partisan divisions in Congress and the upcoming general election could make legislation difficult.

U.S. House Speaker Nancy Pelosi gestures while speaking at the Democratic National Committee's summer meeting Friday, Aug. 23, 2019, in San Francisco. More than a dozen Democratic presidential hopefuls are making their way to California to curry favor with national party activists from around country. Democratic National Committee members will hear Friday from top contenders, including Elizabeth Warren, Kamala Harris and Bernie Sanders. (AP Photo/Ben Margot)

According to J.P. Morgan, Trump is likely to face some resistance from within his own Republican Party — but the biggest obstacle would be Democrats, who don’t want to hand Trump a victory that may help his reelection chances.

“Perhaps most crucial is the question of whether Democratic legislators would support a stimulus bill that could be seen as benefiting President Trump,” Edgerton said.

Trump could try to stimulate the U.S. economy via executive action, the economist argued. However, bypassing Congress in order to achieve the effect of a tax cut would not have a meaningful impact on the U.S. economy, according to Edgerton’s analysis.

“Because a $20 billion annual tax cut amounts to less than 0.1% of US GDP, we would expect only de minimis effects,” he wrote.

That leaves legislation hammered out with Democrats as the most effective way to boost the economy, according to the economist.

Although partisan tensions are high, with Democrats trying to retake the White House, Edgerton said there was a possibility of bipartisan legislation. He cited the precedent of President George W. Bush working with a Democratic Congress to pass a stimulus bill in 2008.

“While such bipartisan cooperation may seem quaintly charming today, it nonetheless failed to prevent the 2008 recession,” he added.

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