Election race enters final stages - Capital Economics
US Economics

Election race enters final stages

US Economics Weekly
Written by Paul Ashworth
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With the final debate now done and dusted, America enters the final two weeks of the presidential election campaign with Joe Biden still leading in the polls and betting markets suggesting the Democrats will win control of the Senate as well as the White House.

With the final debate now done and dusted, America enters the final two weeks of the presidential election campaign with Joe Biden still leading in the polls and betting markets suggesting the Democrats will win control of the Senate as well as the White House.

Since we are now less than two weeks away from election day on 3rd November – and with the Senate focused on confirming Amy Coney Barrett’s Supreme Court nomination – there is almost no prospect of any late pre-election fiscal stimulus being passed. House Speaker Nancy Pelosi has kept the White House in negotiations, but mostly because she thought she could drive a wedge between the President and the Senate Republicans. A deal could still be reached in the post-election lame duck session of Congress, though we suspect the White House will lose interest in any negotiations if Biden wins, and Donald Trump could even perform a U-turn and veto any bill.

Market speculation has been growing that a Democratic clean sweep would open the doors to a big post-election stimulus. But there is still considerable uncertainty about the timing, composition, and size of any stimulus next year. (See here.) Without a 60-seat majority to invoke cloture in the Senate, the Democrats will be forced to rely on the budget reconciliation process to pass any major fiscal legislation. That means any bill would have to comply with the so-called Byrd rules, which restrain the long-run impact on the budget deficit.

More importantly, budget reconciliation can only be used once a year, which will put the Democrats in a bind. Do they rush to pass a pure deficit-financed stimulus along the lines of the $3trn HEROES Act recently passed by the Democrat-controlled House? Or should they wait to incorporate all, or part, of Biden’s own fiscal plan, which funds more than $4trn in additional spending with higher taxes on businesses and high-income earners?

It would usually take six months or more to turn Biden’s plans into a concrete bill that has the support of a majority in both Houses. (For comparison, it took Reagan seven months to pass his 1981 tax cut and Bush six months to do the same in 2001. Trump took 11 months in 2017, because his administration first wanted to use that year’s budget reconciliation to reform health care, which ended in acrimony.)

Unless Biden convinced enough centrist Senate Republicans to vote for the stimulus, which would ensure a filibuster-proof 60 votes, the Democrats’ only other option would be to scrap the cloture rule entirely. We certainly wouldn’t rule out that possibility. It was a Democratic-controlled Senate in 1975 that reduced the number of votes required to invoke cloture from 67 to the current 60. Senate Democrats eliminated the filibuster for executive branch and regular judicial nominees in 2013 and Senate Republicans eliminated it for Supreme Court nominations in 2017. But scrapping the filibuster would be a last resort, it isn’t something that is going to happen on day one of the 117th Congress.

Google hit with anti-trust lawsuit

The Trump administration beat the Democrats to the punch, hitting Google with their own anti-trust lawsuit this week. This looks like a re-run of the Microsoft anti-trust lawsuit from the late 1990s/ early 2000s. That lawsuit took umbrage with the dominant position of Microsoft’s internet explorer browser, whereas this one focuses on Google’s domination of search within browsers. In the end, after years of appeals, Microsoft ended up with little more than a slap on the wrist when the suit was settled in 2004. But it is worth remembering that the original court judgement in 2000 did order the break-up of Microsoft into two units. The key lesson is that big anti-trust cases can rumble on for close to a decade, with plenty of twists and turns along the way.

The week ahead

Less than a week before the election, the President should receive the good news that the economy rebounded by 30% annualised in the third quarter. Nevertheless, that would still leave GDP 4% below its pre-pandemic level, so whether the economy is a positive or negative for Trump is unclear.


Data Previews

Durable Goods Orders (Sep.) 08.30 Tue. 27th Oct.

Forecasts

Previous

Median

Capital Economics

Headline orders

+0.5%

+0.3%

-1.3%

Core (ex-transport)

+0.6%

+0.5%

-0.5%

Orders slide, but still above pre-pandemic level

Our calculations point to a modest drop back in durable goods orders in September but, with non-aircraft orders already back at pre-pandemic levels, that would not be a sign of a renewed economic collapse.

With global travel still mothballed and Boeing no closer to getting its 737 Max back in the air, the plane-maker once again received more cancellations (3) than orders (0) last month. With the already-released production figures pointing to a 4% m/m decline in motor vehicle orders, we estimate that transportation orders declined by 3.0% overall.

Core orders only fell by 10% during the lockdowns, but those losses had been fully reversed by August. The survey evidence is still upbeat, but the decline in business equipment production in September suggests that core orders fell by 0.5% m/m. (See Chart 1.) Together with the anticipated decline in transport, that would translate into a 1.3% m/m fall in overall durable goods orders.

Chart 1: Bus. Equip. Prod. & Durables (%m/m)

Source: Refinitiv

GDP (Q3, 1st Est.) 08.30 Thu. 29th Oct.

Forecasts

Previous

Median

Capital Economics

GDP

-31.4%

+32.0%

+30.0%

Rebound led by consumption resurgence

We estimate that GDP rebounded at a 30% annualised pace in the third quarter, although that would still leave it 4% below the peak in the fourth quarter of last year. (See Chart 2.)

The rebound was driven by consumption, which we calculate increased by nearly 40% annualised, as a substitution in favour of goods spending helped offset lingering weakness in services. Investment was something of a mixed bag, with big rebounds in equipment and residential more than offsetting ongoing weakness in non-residential structures.

We have assumed that government expenditure increased by a relatively muted 3%, based on the monthly budget and employment numbers. But it is notable that the Atlanta Fed has a much bigger gain factored in, which explains why they estimate third-quarter GDP growth was as high as 35%.

Finally, we expect a positive contribution from a slower inventory draw down will roughly offset a drag from net external trade. Consumer goods imports have rebounded particularly strongly, but some key export sectors – particularly aircraft – are still getting hammered by the ongoing effects of the pandemic.

Chart 2: Contributions to GDP Growth (% pts)

Sources: Refinitiv, CE

Personal Income & Spending (Sep.) 08.30 Fri. 30th Oct.

Forecasts

Previous

Median

Capital Economics

Personal Income

-2.7%

+0.4%

-0.2%

Personal Spending

+1.0%

+1.0%

+1.0%

Consumption boosted by another strong gain in goods spending

We anticipate a 1.0% m/m increase in nominal consumption in September, as another strong month for goods spending helped to offset a weaker gain in services spending. (See Chart 3.)

The unexpectedly strong 1.4% m/m gain in core retail sales implies that goods spending had another strong month in September, with manufacturers’ unit sales also pointing to a solid increase in motor vehicles spending. The only blemish is that, thanks to a drop back in demand, gasoline spending fell.

Services spending was more of a disappointment. Admittedly, the 4% m/m decline in utilities spending we pencilled in – based on the already-reported fall in output – is a weather-related blip. But the retail sales figures also pointed to a much more modest rise in food services spending.

Our calculations indicate that personal incomes fell by 0.2% m/m, as a more modest gain in labour compensation failed to offset a further drop back in unemployment insurance payments. Nevertheless, with the savings rate still unusually elevated at more than 10%, there is still scope for further solid gains in consumption in the coming months, even if Congress fails to agree on a renewal of the enhanced unemployment benefits.

Chart 3: Real Consumption

Source: Refinitiv


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Release/Indicator/Event

Time EDT (GMT-4)

Previous*

Median*

CE Forecasts*

Mon 26th

New Home Sales (Sep)

10.00

1,011,000

1,025,000

1,025,000

Tue 27th

Durable Goods Orders (Sep, Prov.)

08.30

+0.5%

+0.3%

-1.3%

Core Durable Goods Orders (Sep, Prov.)

08.30

+0.6%

+0.5%

-0.5%

Case-Shiller House Prices (Aug)

09.00

+0.4%(+4.8%)

Conference Board Consumer Confidence (Oct)

10.00

101.8

101.8

105.0

Wed 28th

Advance Goods Trade Balance (Sep)

08.30

-$82.9bn

-$85.0bn

-$85.0bn

Advance Wholesale Inventories (Sep)

08.30

+0.4%

Advance Retail Inventories (Sep)

08.30

+0.8%

Thu 29th

Initial Jobless Claims (w/e 24th Oct)

08.30

787,000

GDP (Q3, 1st Est.)

08.30

-31.4%

+32.0%

+30.0%

Pending Home Sales (Sep)

10.00

+8.8%(+20.5%)

+3.5%

Fri 30th

Personal Income (Sep)

08.30

-2.7%

+0.4%

-0.2%

Personal Spending (Sep)

08.30

+1.0%

+1.0%

+1.0%

PCE Deflator (Sep)

08.30

+0.3%(+1.4%)

+0.2%(+1.5%)

+0.2%(+1.5%)

Core PCE Deflator (Sep)

08.30

+0.3%(+1.6%)

+0.2%(+1.7%)

+0.2%(+1.7%)

Employment Cost Index (Q3)

08.30

+0.5%

+0.6%

Chicago PMI (Oct)

09.45

62.4

58.0

60.0

Selected future data releases and events

2nd Nov

ISM Manufacturing Index (Oct)

10.00

3rd Nov

Presidential Election

4th Nov

International Trade (Sep)

08.30

ISM Services Index (Oct)

10.00

5th Nov

Fed Policy Announcement

14.00

6th Nov

Employment Report (Oct)

08.30

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

%q/q ann. (%y/y) unless stated

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

2020

2021

2022

GDP

+30.0

+4.5

+4.4

+4.0

+4.0

+4.0

(-3.7)

(+4.5)

(+4.0)

CPI Inflation

(+1.3)

(+1.4)

(+1.7)

(+3.3)

(+2.5)

(+2.4)

(+1.3)

(+2.5)

(+2.3)

Core CPI Inflation

(+1.7)

(+1.8)

(+1.9)

(+2.9)

(+2.3)

(+2.2)

(+1.8)

(+2.3)

(+2.2)

Unemp. Rate (%), Period Ave.

8.9

7.5

6.2

5.9

5.6

5.5

8.3

5.8

5.4

Fed Funds Rate, End Period (%)

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

10y Treas. Yld., End Period (%)

0.69

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

S&P 500, End Period

3363

3300

3300

3350

3400

3500

3300

3500

3750

$/€, End Period

1.17

1.20

1.20

1.20

1.20

1.20

1.20

1.20

1.20

¥/$, End Period

106

105

105

105

105

105

105

105

105

Sources: Refinitiv, Capital Economics


Paul Ashworth, Chief US Economist, paul.ashworth@capitaleconomics.com