Market View

Coming up trumps – US midterms

The headline results of the US midterms are now known and - after what feels like months of speculation and anticipation, and column inches that could span the contiguous 48 states - we can now begin to understand the policy and economic implications of the election.


Tammy Hall, Head of Portfolio Management, LGT Wealth Management US

The results

Whilst human impulse motivates us to declare a winner or loser, the reality is that both parties can claim a positive outcome, with the Democrats arguably performing better than expected. Firstly, we learned that the Republican party have claimed a majority in the House of Representatives. With six seats uncalled, the GOP have claimed 218, one short of an overall majority, and are ahead in a number of those that are still counting. Whilst the majority is smaller than expected, the outcome is in line with pre-election predictions. The Senate outcome is where the Democrats have exceeded expectations, with the caucus likely to reach 50 seats, including two independent senators that vote in line with the Democrats. For the final result, we will be reliant on the runoff election in Georgia on December 6th, where the rules state that the successful candidate must gain over 50% of the vote.

Winners and losers

Tabloids and newspaper outlets, whilst unable to report on a concrete winner, have been all too happy to declare a loser from the midterms, putting forward former US President, Donald Trump, as a potential candidate. Despite a number of so-called “election deniers” winning their seats in both the Senate and House, some high-profile candidates with backing from Trump lost in their bid for office – notably Mehmet Oz in the Senate and Kari Lake in the Arizona gubernatorial election. The Republican governor of Florida – Ron DeSantis – won re-election with the largest margin of victory in the state since 1982. As a result, it is now widely expected that he will stand for nomination in the 2024 Presidential election, whilst also being seen as the candidate most likely to successfully rival President Trump.

Midterm elections tend to be seen as a referendum on the sitting President. By this measure, the Congressional Democrats have performed better than expected, both in the House and Senate, with polling showing the approval ratings for President Biden in the range of 40% in the period before the election.

Policy implications

The immediate outcome of this election is likely to be impasse in Congress. With both Legislative Branches controlled by a different party, neither of which being given to compromise, their competing priorities are likely to result in the legislative agenda of each party being subject to intense negotiation. It is therefore unlikely that key planks of the Biden policy programme in green spending, infrastructure and further student loan forgiveness will proceed.

The lame duck session – the period between the election and the time where the newly elected Congressional representatives take their seats – will be key in setting the tone for the next two years, with the Democrat controlled Senate and House able to implement some spending measures. The voting behaviour of the minority Republicans may well act as a guide to the ability for compromise in the period to the next election. The US budget is normally passed by both branches in a process known as resolution and given the slim majorities in both, we will soon understand the willingness of either party to give ground in order to have their priorities included.

Perhaps most pressingly, the debt ceiling is projected to be hit around July next year, requiring Congressional approval for its increase. There are a number of measures that can be taken in order to extend this deadline, but this will need to be resolved before the end of the third quarter of 2023. Periods of debt ceiling negotiations have historically been fraught, with failure to agree an increase resulting in government shutdown. A government shutdown leads to workers being furloughed, a further cohort working without known payment dates, various government spending programmes suspended, and the temporary closure of several agencies.

Economic implications

As it is 2022, any discussion of economics must include inflation and reduced government spending programmes are likely to translate into a lower level of inflation as, simplistically, less funds circulate in the economy. This transmission mechanism is not exact, but it tends to follow that higher government spending will have an inflationary impulse. As discussed in previous editions of The Brief, lower levels of expected inflation may allow the Federal Reserve to slow their path of interest rate increases, if accompanied by the creation of some slack in the labour market.

A government shutdown would have a direct impact on economic growth. The Obama White House Archives contain a report from November 2013 estimating that the shutdown of that year would reduce fourth quarter GDP growth by 0.2-0.6% and would have a direct impact on private sector job creation, on top of the estimated three million government employees who were either furloughed or received delayed pay. In a year where economic growth is likely to be challenged, this is a cost the economy may struggle to absorb.

At present, while the results of the election are broadly known, the policy outcomes and eventual impact are still unclear. It will certainly be an eventful session of Congress in anticipation of a Presidential election that is now less than two years away.

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