The good news is that no election outcome is likely to wreck the economy. The less-good news is an economy that has been booming in recent months looks primed to cool off soon regardless of who controls Congress.
That’s the emerging consensus on Wall Street as voters prepare to render their verdict.
Congressional Republicans are focusing on the economy in their closing pitch, arguing a Democratic takeover of one or both chambers would erase the gains they say their tax cuts and deregulation have provided.
But economists for the big banks and beyond say the midterms probably won’t bend the economy’s trajectory much, no matter who comes out on top. That’s in part because even if Republicans defy expectations and maintain their control of both chambers of Congress, these forecasters rate a big tax or infrastructure package that would inject a new jolt as a long shot. And the election result most expect — with Democrats reclaiming the House, while the GOP keeps its grip on the Senate — should all but guarantee gridlock on Capitol Hill.
If that proves true, an economy that just put together its strongest back-to-back quarters in four years should start losing some steam as the effects of the stimulus supplied by the major GOP tax cut package and the spending bill that followed it start to fade. Plus, economists agree, the expansion will face some extra drag from President Trump’s tariffs and a Federal Reserve that continues to raise interest rates. The Fed itself projects economic growth will slow to 2.5 percent next year and 2.0 percent in 2020; private economists I talked to pegged growth next year between 1.9 percent and 2.5 percent.
“We’re in an economy that’s resilient for the time being but will face some head winds, from policy in particular but also momentum,” says Gregory Daco, head of U.S. economics at Oxford Economics, a research firm. “Growth will be slowing, and the midterms won’t change much in terms of that outlook.”
A deficit groaning under the added weight of massive tax cuts probably has limited the options for lawmakers to ring up new spending. So in an all-GOP Washington, “we might see slightly more fiscal stimulus, but only on the order of a couple of tenths of a percentage point of GDP,” Alec Phillips, chief U.S. political economist for Goldman Sachs, said in a recent research report.
Similarly, the election outcome rated unlikeliest, with Democrats retaking both chambers, probably wouldn’t reset the economy’s course. “Historically, federal government policy has had macroeconomic implications only if it affects the overall level of taxation or spending in a meaningful way,” JPMorgan economists wrote recently. “The Republican majority on Capitol Hill has achieved their main feasible objectives in this respect, particularly the Tax Cuts and Jobs Act, and so whether or not they retain sole control of Congress should do little to change this aspect of fiscal policy. Even in the unlikely event the Democrats gain control of both chambers, any attempt to undo the Republican policies of the last two years would likely face the veto pen of the president.”
The assessments come with some important asterisks. Washington faces a pair of key fiscal deadlines in the months ahead that could rattle the economy if policymakers can’t come to an agreement. On Dec. 7, the federal government’s funding runs out, requiring lawmakers to pass an extension at a minimum to stave off a shutdown. Next year, the new Congress will need to raise the debt ceiling, which has been suspended through March 1. “Those are two interesting pressure points,” says Joel Prakken, chief U.S. economist for Macroeconomic Advisers by IHS Markit. On the debt ceiling, he says he’s “wondering how that’s going to play out. Will it be used as bargaining leverage as it was in 2011, creating mild panic in financial markets? Does the use of it depend on who’s in control?”
And then there’s the issue of trade. Trump’s campaign to reorder the nation’s trading relationships, and the tariffs he’s leveled in pursuit of the goal, shows how much room he has to move unilaterally. And that could prompt Trump to take an even more aggressive approach if Democrats reclaim a chamber, says Lewis Alexander, chief U.S. economist at Nomura. On the other hand, he says, “if the economy is weakening, he may be more reluctant to move.”
Goldman’s Phillips agreed that Trump could look to spend more time pushing his trade offensive if it offered a reprieve from facing down Democrats on other issues. And he notes that the congressional approval process for the reworked North American Free Trade Agreement could get bumpier with Democrats empowered in Congress. “So, while we don’t expect big changes to the trajectory of trade policy as a result of the midterms, none of the potential paths look particularly market-friendly.”
Indeed, Deutsche Bank economists see Trump turning more aggressive if Republicans outperform expectations. As the bank’s economists wrote in a recent note, “If Republicans keep control of both the House and the Senate that would be interpreted by the administration and the market as public support for the trade war, likely leading to further escalation.”
Trump has also argued that Democratic control would tank the stock market, a claim for which there is no historical basis, as we wrote here last week. Looking ahead, Bank of America economists don’t see support for the argument either. As they summed it up in an election preview, “Our base case view of a split Congress could be supportive of equities, as markets historically do well under gridlock (nothing done, nothing undone).”
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— Fed expected to hold its fire — this week. The Associated Press's Martin Crutsinger: “With the economy strong, wages rising and unemployment at a near-five-decade low, the Federal Reserve remains on track to keep raising interest rates — just not this week. After the Fed’s latest policy meeting, it’s expected to signal a healthy outlook for the economy but to hold off on any further credit tightening, most likely until December. A rate hike in December would mark the fourth this year . . . In its most recent forecast, the Fed projected that it would raise rates three additional times in 2019. Some economists, though, foresee only two hikes . . . ‘The Fed is going to have to continue raising rates next year because the unemployment rate is going to keep falling to close to 3 percent, well beyond full employment,’ said Mark Zandi, chief economist at Moody’s Analytics. ‘There is nothing but green lights for more rate hikes straight ahead.’ ”
— Trump's stock market bragging rights. Reuters's Noel Randewich: "Trump has taken credit for the stock market’s gains during his nearly two years in the White House, and those claims are reasonable given the impact of tax cuts and pro-business policies on investor sentiment. The S&P 500 has risen 28 percent since Trump’s election in November 2016 to the eve of congressional midterm elections on Tuesday. This surpasses the market’s performance over the same time frame under any other president in the past 64 years. Under President Dwight Eisenhower, the S&P 500 rose 29 percent from his election in November 1952 through November 1954... Still, other sectors that could have been expected to benefit strongly from a Trump presidency have lagged. Indeed, the individual stocks that have gained and lost the most during his reign have little discernable link to Trump’s presidency.
— Asian investors buy fewer Treasurys. The Wall Street Journal's Daniel Kruger: “Asian investors are proving less and less eager to buy U.S. government bonds, even as the Treasury Department prepares to sell $1.3 trillion of new debt in the new fiscal year. Foreigners increased their holdings of Treasurys by $78 billion in the first eight months of this calendar year, according to the Treasury. That is just over half of what they bought in the same period last year... Many observers assume the U.S. has no trouble finding demand for its debt in the vast pool of world-wide governments, financial institutions, mutual funds and individual investors who want to own the world’s major risk-free asset. Yet the Treasury is finding fewer buyers in some parts of the world, leaving domestic investors such as mutual funds to pick up the slack.”
— U.S., Chinese officials to meet. Reuters: "The United States and China will hold a delayed top-level security dialogue on Friday, the latest sign of a thaw in relations, as China’s vice president said Beijing was willing to talk with Washington to resolve their bitter trade dispute... In a concrete sign of the unfreezing, the U.S. State Department said Secretary of State Mike Pompeo, Defense Secretary Jim Mattis, Chinese politburo member Yang Jiechi and Defense Minister Wei Fenghe will take part in diplomatic and security talks later this week in Washington."
As China shuns U.S. soybeans. The New York Times's Binyamin Appelbaum: “This is harvest season in the rich farmlands of the eastern Dakotas, the time of year Kevin Karel checks his computer first thing in the morning to see how many of his soybeans Chinese companies have purchased while he was sleeping... But this year, the Chinese have all but stopped buying . . . The Chinese government imposed a tariff on American soybeans in response to the Trump administration’s tariffs on Chinese goods. The latest federal data, through mid-October, shows American soybean sales to China have declined by 94 percent from last year’s harvest.”
But farmers still back Trump. Bloomberg News's Isis Almeida and Mario Parker: “Don Latham, a 10th generation farmer in Iowa, is harvesting corn and soybeans in a tough market amid [Trump’s] trade war with China. But he’s still voting Republican when he heads to the polls Tuesday. ‘Trump is what he is,’ he said last week from his combine as he gathers part of this year’s bumper crop. . . . Latham is one of many growers supporting Trump even as the trade war with Beijing spurred retaliatory tariffs that have sent soybean prices to the lowest in more than a decade.”
Ivanka secures new Chinese trademarks. NYT's Austin Ramzy: "China granted initial approval for 16 new trademarks to Ivanka Trump, the president’s elder daughter and senior adviser, renewing questions about the Trump family’s intermingling of official roles and international business interests. Among the broad array of trademarked items were shoes, shirts and sunglasses — the sort of products that were sold under her recently closed fashion label. Other categories given initial approval were less obvious fits, like voting machines, homes for senior citizens and semiconductors. [The effort] has spurred criticism that the Trumps’ roles in government smooth the way for the trademark approvals, and that the prospect of future Trump business in China clashes with the White House’s attempts to challenge the country over trade."
— U.S. announces waivers over Iran sanctions. WSJ's Ian Talley and Courtney McBride: “The Trump administration issued waivers on Monday to eight governments, exempting them from sanctions on Iranian oil that took effect at midnight. China, India, Italy, Greece, Japan, South Korea, Taiwan and Turkey received waivers that would allow them to continue ‘temporary’ imports of Iranian crude without facing penalties, Secretary of State Mike Pompeo said Monday morning. Washington imposed a ban on Iranian oil imports and sanctioned more than 700 Iranian banks, companies and individuals, officially launching the second phase of its maximum pressure campaign... Iran’s international sales have fallen by a third in the lead-up to the second round of economywide sanctions, but top Trump administration officials say they are seeking to cut Tehran’s exports to zero in the coming months, threatening to punish anyone caught violating its crude embargo.”
— Amazon looks at two cities for HQ2. NYT's Karen Weise and J. David Goodman: “After conducting a yearlong search for a second home, Amazon has switched gears and is now finalizing plans to have a total of 50,000 employees in two locations ... The company is nearing a deal to move to the Long Island City neighborhood of Queens ... Amazon is also close to a deal to move to the Crystal City area of Arlington, Va., a Washington suburb ... Amazon already has more employees in those two areas than anywhere else outside of Seattle, its home base, and the Bay Area. Amazon executives met two weeks ago with Gov. Andrew M. Cuomo in the governor’s Manhattan office, said one of the people briefed on the process, adding that the state had offered potentially hundreds of millions of dollars in subsidies. Executives met separately with Mayor Bill de Blasio.” (Amazon.com founder and chief executive Jeffrey P. Bezos owns The Washington Post.)
— Citigroup picks new chairman. WSJ's Telis Demos: “Citigroup Inc. is keeping chairman and chief executive roles separate. The bank’s board on Monday said it has selected director John Dugan, a former top banking regulator, as its next chairman. Mr. Dugan will move into the role in January, following Michael O’Neill’s retirement, setting him up to preside over the bank’s annual meeting next year. Mr. O’Neill’s retirement next year was expected, but the board hadn’t before indicated how it would replace him. While some other banks that split the chief executive and chairman roles after the financial crisis have recombined them, Citigroup has kept them apart.”
— Goldman ahead of revenue target. Reuters's Matt Scuffham: “Goldman Sachs Group Inc is tracking ahead of its goal to generate $5 billion in additional annual revenue by 2020 as growth initiatives bear fruit, its new finance chief said on Monday. The revenue-boosting plan that management laid out last year has produced $2.5 billion so far in 2018, according to a presentation by Chief Financial Officer Stephen Scherr at an industry event. He stopped short of increasing the target, but suggested Goldman could still do better... Goldman, once considered the most savvy Wall Street trading house, has suffered as tougher regulations make it harder to maintain profits at its trading businesses and as customer trends change since the 2007-2009 financial crisis.”
— Former banker's conviction overturned. Reuters's Jonathan Stempel: “A divided federal appeals court on Monday overturned the insider trading conviction of a former Wall Street investment banker accused of passing tips about five mergers in the healthcare industry to his father, and ordered a new trial. In a 2-1 decision, the 2nd U.S. Circuit Court of Appeals said Sean Stewart, who worked at JPMorgan Chase & Co and Perella Weinberg Partners, should have been allowed to challenge a crucial piece of evidence, a recorded conversation between his father and a friend who was cooperating with prosecutors... Stewart was convicted in August 2016 on nine fraud and conspiracy counts for passing tips to his father Robert from 2011 to 2015.”
— Congress is broken. The Post's Paul Kane and ProPublica's Derek Willis: "For more than 200 years, Congress operated largely as the country’s founders envisioned — forging compromises on the biggest issues of the day while asserting its authority to declare war, spend taxpayer money and keep the presidency in check.Today, on the eve of a closely fought election that will determine who runs Capitol Hill, that model is effectively dead.
"It has been replaced by a weakened legislative branch in which debate is strictly curtailed, party leaders dictate the agenda, most elected representatives rarely get a say, and government shutdowns are a regular threat because of chronic failures to agree on budgets, according to a new analysis of congressional data and documents by The Washington Post and ProPublica."
Among the more striking findings: "Committees meet to consider legislation less than ever. As recently as 2005 and 2006, House committees met 449 times to consider actual legislation, and Senate committees met 252 times; by 2015 and 2016, those numbers plummeted to 254 and 69 times, respectively, according to data compiled by the Policy Agendas Project at the University of Texas."
— Corporate penalties plunge. NYT: “At a time when the Trump administration is loosening rules established in the aftermath of the 2008 financial crisis, financial penalties imposed on companies and big banks accused of wrongdoing have fallen precipitously since the Obama administration, according to analyses by The New York Times. In consultation with outside experts, The Times conducted separate examinations of enforcement activity at the Securities and Exchange Commission and the Justice Department, comparing cases filed during the first 20 months of the Trump presidency with those in the final 20 months of the Obama administration.
“The analysis found a 62 percent drop in penalties imposed and illicit profits ordered returned by the S.E.C. At the Justice Department, the analysis found a 72 percent decline in corporate penalties from criminal prosecutions, and a similar percent drop in certain civil penalties against financial institutions.”
- Federal Reserve Vice Chairman for Supervision Randal Quarles delivers a speech on financial regulation at the Brookings Institution on Friday in Washington.
- Senate Judiciary Committee hearing titled “Big bank bankruptcy: 10 years after Lehman Brothers” on Nov. 13.
- Senate Banking Committee hearing on “Oversight of pilot programs at Fannie Mae and Freddie Mac” on Nov. 14.
- Federal Reserve Vice Chairman for Supervision Randal Quarles appears before the Senate Banking Committee on Nov. 15.
- The National Economists Club holds an event titled “US Outlook: Exploring the Key Debates” on Nov. 15 in Washington.
— From The Post's Tom Toles: “Election Day in the marketplace of ideas: Shop wisely.”
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