Impacts on the economy

This brief note is meant to help assess the impact of the November 8th elections on the US economy and, in the shorter term, on the financial markets. This impact depends not only on who actually becomes President: as the Obama Administration so amply demonstrated, the balance of Democrats and Republicans in Congress is just as important to the operation of the US Government. And next Tuesday, one-third of Senate seats and all House of Representatives seats are also up for re-election. The outcome of these elections will largely determine how much leeway the new President will have with the budget in particular.

Hillary Clinton's economic platform is relatively conventional, including investments in infrastructures and large-scale measures aimed at redistributing income to the middle classes, mainly by raising taxes on the wealthiest. The implementation of this policy would give a slight boost to US growth, mainly in 2018, without significantly altering the public deficit trend. For her platform to stand a chance, however, Democrats would have to take a majority of the seats in both the House and the Senate. And, even if they do, the actual measures adopted would be subject to negotiation: a candidate's platform is the candidate's alone, and is not necessary shared by the entire Party in Congress! If on the other hand the Republicans retained the majority in Congress, Clinton's proposed tax hikes would be dead in the water. A compromise could possibly be reached, however, with infrastructure spending approved in exchange for the readjustment of the corporate tax at a reduced rate (accompanied by a repatriation tax break). Such a compromise would be more likely if the Democrats took control of the Senate. 

Donald Trump's platform is much more “disruptive” not only in terms of international trade, but also the budget. Trump is also pushing infrastructure investment, but with massive tax cuts that would primarily benefit the wealthiest Americans and corporations. Without the minimum 3.5% growth he has promised for the next ten years, these tax cuts would cause the deficit to explode. For that very reason, they are unlikely to be approved by Congress, even if the Republicans hold the majority in both the House and the Senate. 

Even assuming that the political tensions sparked during the electoral debate dissipate quickly, it will take several months to assess the impact of the elections on the economy, regardless of who is elected President. The attached possible outcomes’ tree gives the likelihood of each outcome based on the information available as of Monday: it clearly shows that the election of Donald Trump combined with an enhanced Republican majority in Congress would throw the markets off balance. We will be updating this tree – and simplifying it if possible! – late Wednesday morning.