Recession could affect next year’s midterm elections

President Donald Trump campaigned on a pledge to make consumer staples less expensive. But his decision to impose massive tariffs on America’s trading partners has the potential to increase inflation and ultimately lead to an economic slowdown, analysts said.

This could in turn pose a problem for Republicans in next year’s midterm elections, as midterms generally favor the party that is currently out of power. And even more so in times of economic uncertainty.

“It is said that voters vote their pocketbooks and no doubt that will impact the upcoming midterm elections,” George Georgiou, a professor of economics at Towson University, told Baltimore Post-Examiner.

“There is the normal business cycle impact of a recession and there is a political business cycle impact. In the present situation, these are both aligned, to negatively impact the current political administration in the midterm elections. It is not only the Rest of the World that will hold the USA responsible for any global recession, but also the American electorate.”

Arabinda Basistha, a professor of economics at West Virginia University, said the severity of the economic impact could influence voter behavior.

“The changes in the economy will affect next year’s midterm elections. The critical bits are inflation and the possibility of recession. If both happen, it will certainly have a large effect among voters. Tariffs do create a higher chance of both happening, although it is unlikely that moderate tariffs will lead to that. Inflation rates below three percent and unemployment rates below 4.5 percent are unlikely to affect the voters too much.”

Increased price in consumer staples?  

Right now, it may be too early to assess how tariffs may impact inflation.

When Trump assumed office on Jan. 20, the price of a dozen eggs was about $5.00. And though by March, the price of those same dozen eggs had soared to a record high of more than $6.20, the price had dropped to $3.26 by early April.

The price of a gallon of milk has remained just above $4 from January until now.

Eggs and milk tend to be domestic staples. Egg price volatility can in part be attributed to shortages related to the Avian flu virus.

The price of a gallon of gasoline has increased by about 13 cents from January to today. Oil tends to be produced in the Middle East and could go up in price with tariffs.

Tariffs on China could really hurt U.S. consumers buying every day staples, as could tariffs on E.U. nations and Japan for Americans who are looking to buy a new car.

Those tariffs are currently levied at 25%.

It has been reported that the administration is considering tariffs on pharmaceutical imports, which could increase the price of many popular generic drugs that people rely on for a variety of conditions.

But perhaps the biggest threat of the tariffs-for the estimated 60% of Americans who invest in the stock market-comes in the form of steep declines in equity prices.

Those at or approaching retirement age are poised to feel the pinch the most.

Barrons reported on Monday that the Dow is poised to end the month with its worst April performance since 1932, when the U.S. was in the throes of the Great Depression.

Administration officials have said that while the tariffs may lead to temporary market turmoil, they do not expect a recession.

Many of the world’s leading economists have said they disagree with that assessment and ultimately do expect a recession, placing the odds as high as 60% in the coming months.

How likely is a recession in the near future? 

“Chances of a recession happening sometime soon cannot be ruled out,” Basistha said.

“It will depend on where the recent policy changes stabilize and how much their effect is on the households and businesses. The current macroeconomic situation is of high uncertainty. That usually leads to a pause in business and economic decisions. But there is no hard data that reflects a serious softening of the economy has already happened. The initial claims data till April 5 is quite normal.”

Heavy tariffs increase the probability of a recession, Basistha said.

“If the tariff increases are kept moderate, say 10%, it is unlikely that it will result in a major decline of the US economy. The economy is in a good shape to absorb moderate cost changes. Large increases in tariffs could create bigger disruptions for households and businesses.”

Georgiou said a recession would be “self-inflicted” via tariffs.

Economic expansions and contractions are a normal part of any business cycle. What is not normal is that the present looming recession is due to a misguided tariff policy and is thus self-inflicted. It appears that the present policymakers have chosen to ignore the lessons offered by two hundred and fifty years of economic theory, beginning with Adam Smith (1776) and David Ricardo (1817), and the more recent economic history of the Great Depression of the 1930s.

It is a foregone conclusion of the Economics profession that free trade is mutually beneficial and maximizes social welfare. Protectionism is inefficient, leading to lower economic growth and lower employment. The present incoherent and on-and-off implementation of tariffs adds further uncertainty, which adds to both a more volatile stock market, which furthers the probability of an economic recession.”

Moreover, volatile stock prices may foreshadow an upcoming recession, Georgiou said.