Trump vs. Biden, republicans vs. Democrats: in a few days, it will be decided who will be the new u.S. President. Dr. Michael heise analyzes what the two alternatives mean for the u.S. Economy and financial markets.
If democratic presidential candidate joe biden's longstanding stable lead in opinion polls is not deceptive, donald trump could be voted out of office in a matter of days. He would go down as one of the few presidents who could not govern a second term. However, given the experience of the last election and the remaining possibility of "october surprises," this prediction is anything but certain. As is well known, it depends on some swing states who gets the majority of the electoral vote and is appointed president.
In addition, the political and economic impact of the election depends on how the majority in congress changes and to what extent the agenda of the two candidates can be implemented. Congress is currently split, with democrats holding a slim majority of the total 435 seats in the house of representatives and republicans holding the majority in the senate, 53 to 45 (100 seats total; 2 independent senators, but belong to the democrats' caucus).
Chart 1: current poll ratings trump vs biden
Long-term: a choice of direction
In the discussion about the effects of the election results, many people point to commonalities and overlaps in financial and economic policy. That is certainly true. But if you take a longer-term view, the upcoming election is a directional choice for the united states. It is of the greatest consequence for the future of the country, because in key areas of policy, trump and biden stand for very opposite goals. If you go through the long list, you will hardly find any comparable policy approaches: for example, there are contradictions in environmental and energy policy, in health policy and other areas of social policy, in the fight against pandemics, in internal security, in questions of geopolitics, in financial market regulation, in tax and distribution policy, and in the migration issue.
The development of the USA and its role in the world will therefore be determined to a decisive extent by the outcome of this year's election. A continuation of current policies will further weaken the western community and multilateral organizations such as the WTO, WHO or the UN. It would lead to the expectation that chinese power claims could penetrate further. In the event of a democratic election victory, greater international coordination and less confrontation could be expected. However, there is also a tendency among democrats toward protectionism and pushing back against chinese economic power. In addition, if the blue party adopts more regulation-intensive policy approaches and significant tax increases as a prescription, the economic momentum in the largest economy could be slowed down.
Economic policy is expansionary in every case
Similarities between the two election programs exist primarily in their tolerance for very large public deficits and in their alignment with U.S. Interests:
In terms of stimulus policy, president trump is counting on permanently extending the tax cuts for both individuals and businesses that were in place with the 2017 tax reform, but some of which are temporary, and tackling further tax reforms. Biden, on the other hand, announced during the election campaign that he would roll back or modify tax cuts if elected. Democrats seek a high-spending fiscal policy, with key aspects being the implementation of environmental policies and, in clear contrast to trump, the expansion of health care, particularly obamacare.
There are also major differences in terms of regulation. In the financial sector, democrats tend to want to reregulate. Here's how biden seeks to strengthen and enforce dodd-frank legislation. In addition to greater transparency and security, financial institutions should be adequately prepared for a potential systemic shock.
Protectionist tendencies can be found on the agendas of both parties. The supposed protection of american jobs, improved production conditions within the country, and restrictions on competition in favor of american companies, are the watchwords behind the relevant program items. However, as a counterpoint to trump's opaque tariff policy and unilateral approach to trade issues, a biden administration would promise more stability and predictability. Even a reduction in tension in transnational cooperation would benefit the U.S. Economy and that of its trading partners.
The extent to which these election programs can be enforced will depend on the composition of congress. While there are some areas in the u.S., such as regulatory policy or climate protection, where a president can act with executive orders without congress, deliberation and decision-making on the budget are not among them. It is up to congress to decide on spending or taxes with a majority in both chambers.
Assuming that the status quo in congressional majorities is preserved, fundamental changes in tax and spending policy are not very likely to occur. However, it is likely that an agreement on a further stimulus package will be reached if the economic recovery falters and the labor market is slow to recover. In the case of a republican administration, however, this package will be significantly smaller than for a democratic president.
The u.S. Economy achieves a significant plus in 2021
The above-mentioned differences in economic and social policy will shape the medium-term development of the united states. However, 2021 is likely to be heavily influenced by monetary and fiscal policy support measures, as was the case in 2020. In 2020, in response to the employment slump, unemployment benefits were significantly expanded in terms of duration, amount and eligibility for a limited period of time. In addition, one-time payments were made. Tax breaks and direct financial support were granted to companies, and credit programs were launched. Given the sharp drop in economic activity in march and april, real gross domestic product in the second quarter was 9% below the level of the first quarter.
However, also thanks to the support measures, a strong increase in economic output is expected for the third quarter, which will make up for about 70% of the GDP loss in the second quarter. The development is driven by private consumption. The purchase of wares has already surpassed its pre-crisis level again. The strong expansion of consumer spending is supported by a normalization of the savings rate, which had jumped in the second quarter due to constraints on consumption and the disbursement of government transfers. As before, it is still almost 7% percentage points above the level of the fourth quarter of 2019.
Chart 2: development of the monthly savings rate of private households
Business equipment spending has also recovered noticeably, as evidenced by rising capital equipment shipments (excluding defense equipment and aircraft). Slightly stronger new orders in this category (chart 3) indicate further upside potential for equipment spending.
Chart 3: trend in new orders
The housing market is also a bright spot: after years of fairly subdued construction activity, housing starts had already risen at the beginning of the year to almost the average level of previous economic cycles. They have largely overcome the setback in march and april. With solid growth in new home sales and a tighter inventory of homes available for purchase, the signs for a continued increase in housing investment appear positive. Low mortgage rates as part of the expansive monetary policy are providing a major stimulus.
Thus, the U.S. Economy should continue to expand in the final quarter of 2020 and start the coming year on a relatively high "base". This means that even if the trend rates moderate again, economic growth of at least 4% can be achieved in the coming year.
However, it is important that the labor market recovers quickly. The special measures for topping up unemployment benefits expired in part in july and, according to current legislation, will be discontinued entirely at the end of the year. President trump has decreed payments of $300/week to mitigate the loss of the top-up ($600/week) in the short term. Further post-election support is likely to be needed here.
By september, a good half of the pandemic-related drop in employment has been recovered. The fact that labor productivity in the business sector did not decline in the second quarter, but rather increased, speaks for a further improvement in the labor market situation. It is also likely to have developed positively in the third quarter. So companies don't seem to have built up a surplus of workers.
Chart 4: development of employment and labor volume
According to an initial estimate by the congressional budget office (CBO), the aid measures adopted by the government have caused the deficit in the federal budget to soar to a good 15% of nominal gross domestic product in the fiscal year just ended (through september) (2019: 4.6%). In relation to economic output, it has thus increased for the fifth year in succession. For next year, based on the current legislation, the deficit is expected to be lower, but it will still be very high, more than 8% of the GDP. With the federal debt-to-GDP ratio now approaching 100%, the next U.S. President will start his term with a challenging debt mountain.
Reduced fiscal space complicates congressional negotiations on another fiscal package. It is also about the extension of the extended benefits of unemployment assistance. It could turn out considerably if democrats prevail and control both chambers of congress after an election victory. However, this is still speculation at the moment.
Consequences for the financial markets
Over the past few months, financial markets have become somewhat comfortable with democrats' fiscal and economic programs. Concerns about anti-growth tax hikes and excessive regulatory initiatives with a democratic majority have receded. Economic policy is expected to be expansionary bidens. Therefore, major corrections on the financial markets or stronger losses of the US dollar in the event of a change of government are not to be expected.
Should the election bring a clear winner and possibly also different conditions in the chambers of congress, investors will quickly assess the sectoral consequences and dispose accordingly. A probable distribution of winners and losers is included in table 2.
A negative scenario for the stock markets and the U.S. Dollar would be a very close election outcome that creates ambiguity for a few months and leads to a legal aftermath.
Also due to this conceivable scenario, it currently seems advisable not to speculate on a specific election outcome and presumed positive effects. In any case, it has been proven in the past that stock market development was more strongly influenced by fundamental trends than by the respective governing party.