05 NOV


Asset Class , Florence Pisani , Macro

The mid-terms: a non-event for the US economy?

Vital, seriously? The mid-term elections are fast approaching and, with them, a raft of questions, especially as regards macroeconomic issues. What does the US economy look like on the eve of these elections? Will the outcome mark a turning point for the country’s economy? Florence Pisani, Global Head of Economic Research, gives her take.

On the eve of the mid-terms, the US economy continues to defy the doomsayers. At 3.7%, unemployment figures are at their lowest since the late 1960s, while the growth figures are eliciting envious glances from this side of the Pond: after rising by a 4.2% annualized rhythm in the second quarter, GDP was again up – by 3.5% – in the third quarter. The US, in fact, seems on the verge of registering its longest expansionary phase since the mid- … XIXth century: having just started their 113th month of uninterrupted growth, the US is closing in on the 120-month record dating back to the "Great Moderation" of the 1990s.

Such impressive figures should not, nonetheless, conceal some less-impressive hidden truths: the recovery that’s been underway since 2009 has been the most sluggish of the post-WWII period (when growth was twice as slow as during the ‘90s) and the structural problems with which the US economy has been plagued (inequality, low productivity gains, the worrying trajectory of the public debt, …) remain unresolvedi. Even worse, the administration’s fiscal policy will leave its mark: never before in peacetime has the federal debt burden been so heavy – a state of affairs bound to be exacerbated by population ageing and spiralling health costs.

In the shorter term, for sure, the resilience of the economy and a reasonable monetary policy suggest that, barring mishaps, growth will decelerate only gradually in 2019. Braking and giving gas at the same time, as Donald Trump does, is nonetheless not the best way of ensuring the sustainability of the recovery. The President claims to be cutting the corporate tax rate in an attempt to stimulate productive investment. This has been far from the case: over the first half of the year, companies used most of their tax savings on own-share buybacks and there isn’t much chance of the climate of uncertainty brought about by the administration’s trade policy pushing them to invest much more over the next few months. Third-quarter figures even show a productive-investment downtick. Now, in the absence of investment, it might be a while before we see further productivity gains, making the Fed’s job even tougher. Sure, the participation rate of men of working age in the core population (in the 25-to-54 age bracket) could still bounce back slightly, just like the women’s but, without any rise in productivity, the Fed will be forced to go on … restricting growth! And accusing it of endangering the economy by hiking rates won’t change a thing …

Barring a surprise, the result of the US mid-terms has little chance of derailing the economic trajectory in the short term. Trade policy is decided largely at the president’s behest. If the Democrats were to win, they may well decide not to vote in the new trade agreement with Mexico and Canada ("NAFTA 0.8", as its opponents like to call it), but beyond such a knee-jerk response from a partisan opposition, it would not seem to be in their best interests to do so … On the fiscal front, a Democrat victory could perhaps pave the way to an infrastructure plan (even if they may find it inadvisable to support an initiative possibly favourable to a Trump re-election). That said, a Democrat victory would put an end to the "Tax Cut 2.0" plan promulgated by the Republicans. It would also probably usher in a heated debate on the raising of the debt ceiling come the spring …

iCf. Anton Brender and Florence Pisani, The American Economy: a European View, published by CEPS (2018).