Biden now the front runner - Capital Economics
US Economics

Biden now the front runner

US Economics Weekly
Written by Paul Ashworth

The latest polling and betting odds data suggest that Joe Biden is pulling ahead of Donald Trump in the race to win November’s Presidential election. Trump’s approval ratings have taken a hit from his mishandling of the coronavirus pandemic –including the recent surge in infections in the south and west of the country – and the wave of protests in response to the death of George Floyd. Nevertheless, we would be wary of reading too much into a lead for Biden, even one of this size, at this very early stage of the race.

The latest polling and betting odds data suggest that Joe Biden is pulling ahead of Donald Trump in the race to win November’s Presidential election. (See Chart 1.) Trump’s approval ratings have taken a hit from his mishandling of the coronavirus pandemic – including the recent surge in infections in the south and west of the country – and the wave of protests in response to the death of George Floyd. Nevertheless, we would be wary of reading too much into a lead for Biden, even one of this size, at this very early stage of the race.

Chart 1: Odds of Winning Presidential Election (%)

Source: Predict It

It is notable that after a big rally during April and May, the S&P 500 has struggled to post any additional gains since Biden’s odds of winning started to rise from late May onwards. That said, the equity markets more muted performance is also partly due to the surge in the number of new coronavirus infections and renewed signs of tensions between the US and China.

Trump was quick to dismiss the claim by his notoriously hawkish adviser Peter Navarro early this week that the Phase One trade deal with China was ‘over’, tweeting instead that he believed the deal was still “fully intact”. But Trump has taken an increasingly belligerent stance toward China in his recent public appearances, albeit aimed mostly at China’s coronavirus response rather than trade relations. The further behind in the polls he falls, the more he is likely to fall back on bashing China to shore up his support. China has also become more belligerent itself in recent months, tightening its grip on Hong Kong and drawing the ire of the European Union and India too.

The upshot is that we doubt the Phase One trade deal will survive intact until the election in November. The chances of China being able to fulfil its pledge to increase purchases of US goods and services so dramatically were always slim and, considering the pandemic-related slump in global activity, are close to zero now. At some point it will be too tempting for Trump to try and boost his support by unilaterally withdrawing. Whether Trump would impose additional tariffs is unclear, however.

It is also unclear whether, if elected as President, Joe Biden would reverse the tariffs on China. His campaign website includes almost 40 separate sections on Joe’s “bold ideas”, but trade policy is conspicuously absent. The progressives in the Democratic Party might push to maintain Trump’s protectionist policies, but Biden is still at heart a supporter of rules-based free trade. Our guess is that China might be willing to seal a new deal with Biden, knowing that he would be more likely to stick to it.

More generally, the equity market could worry that a Biden victory, coupled with the Democrats winning control of the Senate, would lead to a significant rebound in corporate taxes. But even if the Democrats do win a majority, they will fall well short of a filibuster-proof super-majority in the Senate, which would make it much harder to push through big tax changes. Furthermore, if taxes are raised, it would be as part of a broader fiscal package that included increases in government spending, so any negative impact on the real economy should be more muted.

The week ahead

We estimate that payroll employment rebounded by an additional five million in June, as more furloughed workers went back to their jobs. But that would still leave the unemployment rate at a very elevated 11.5%.


Data Previews

ISM Manufacturing Index (Jun.) 10.00 Wed. 1st Jul.

Forecasts

Previous

Median

Capital Economics

Headline index

43.1

49.0

50.0

Production catching up with consumption

We expect the ISM manufacturing index to rebound to 50.0 in June, as more factories reopened.

Anecdotal reports suggest that many plants, especially in the auto sector, only resumed production late in May. The faster than anticipated return in demand evident in the consumption figures has pushed inventories sharply lower. All that suggests production will need to rebound quickly to meet that demand. The regional survey evidence, as well as the national Markit manufacturing PMI all showed big improvements in June. Our model, based on the early June surveys as well as some global indicators, points to a marked rebound to close to 50 in June. (See Chart 2.)

That would be consistent with quarterly growth in manufacturing production and GDP returning close to zero.

Chart 2: ISM Manufacturing Index & CE Model

Sources: Refinitiv, Capital Economics

Fed FOMC Minutes (9th – 10th June Meeting) 14.00 Wed. 1st Jul.

Minutes to detail discussion of yield curve control

The Fed didn’t spring any real surprises at the FOMC meeting earlier this month, but the updated Summary of Economic Projections suggested officials were more downbeat than other forecasters on the economic outlook.

The median projection for the unemployment rate was 9.3% for the end of this year, while officials also expect annual GDP growth to still be as weak as -6.5% by the fourth quarter. The minutes may reveal whether some participants were incorporating another big wave of infections and renewed lockdowns into those forecasts, with any discussion likely to attract particular attention given the more recent upsurge in new cases in the South and West.

Officials were unsurprisingly dovish on the policy outlook, with only two expecting any rate hikes at all over the next three years. Chair Jerome Powell revealed in his press conference that other options to provide further support were also discussed, including targeting longer-term Treasury yields. The minutes could reveal whether many officials saw the latter as a potentially useful tool. That said, in his more recent testimony to Congress Powell appeared to pour cold water on the idea that yield curve control would be rolled out any time soon and, with long-term Treasury yields already so low, it isn’t clear that it would have much benefit in any case. (See Chart 3.)

Chart 3: Treasury Yield Curve (%)

Source: Refinitiv

 

Employment Report (Jun.) 08.30 Thu. 2nd Jul.

Forecasts

Previous

Median

Capital Economics

Change in Non-Farm Payrolls

+2,509,000

+3,000,000

+5,000,000

Unemployment Rate

13.3%

12.5%

11.5%

Average Hourly Earnings

-1.0%(+6.7%)

-0.5%(+5.5%)

-2.0%(+4.3%)

Average Weekly Hours Worked

34.7

34.5

34.5

The long road back

We estimate that non-farm payroll employment increased by five million in June, as more furloughed employees returned to work. That would be another encouraging sign of the strength of the initial recovery, although it would still leave employment 10% below February levels.

Last month’s 2.5m gain in non-farm payrolls against the consensus expectation for a 7.5m fall suggests we should not be putting too much weight on the jobless claims figures, which continue to show only a limited decline in unemployment. (See Chart 4.)

We’re more inclined to put weight on the high-frequency activity and survey data, both of which point to a marked pick-up in growth in June. A recent paper by Fed Board staff based on weekly private ADP payroll data also suggests the economy gained a few million jobs in the second half of May.

As a result, we are pencilling in a five million rise in non-farm payrolls for June, though with people returning to the labour market, the fall in the unemployment rate is likely to be more muted. We expect a decline to 11.5% from 13.3%, which would still be above the peak in 2008/09, indicating that conditions are still incredibly weak.

Chart 4: Initial Jobless Claims (000s)

Source: Refinitiv

International Trade (May) 08.30 Thu. 2nd Jul.

Forecasts

Previous

Median

Capital Economics

International trade balance

-$49.4bn

-$52.0bn

-$54.0bn

Exports held back by more gradual reopening of factories

We estimate that the nominal trade deficit widened to $54.0bn in May, from $49.4bn, driven by another big fall in exports.

The advance trade report showed the goods deficit widening to $74.3bn, from $70.7bn, as a further 5.8% m/m plunge in exports outpaced a more modest 1.2% fall in imports. Despite the big rebound in consumer spending last month, most factories only started opening up from mid-May onwards. The relatively late reopening of most auto plants, for example, has continued to weigh on motor vehicle trade. (See Chart 5.) With sales rebounding rapidly, however, production should soon follow suit, lifting both exports and imports in June.

Ongoing travel restrictions mean that services trade will take far longer to recover, with the US trade surplus in tourism services likely to remain a fraction of its pre-pandemic level.

Chart 5: Nominal Trade in Motor Vehicles ($bn)

Sources: Refinitiv, Census Bureau


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Release/Indicator/Event

Time EST (BST-5)

Previous*

Median*

CE Forecasts*

Mon 29th

Pending Home Sales (May)

10.00

-21.8%(-34.6%)

+18.9%

Tue 30th

Case-Shiller House Prices (Apr)

09.00

+0.5%(+4.4%)

 
 

Chicago PMI (Jun)

09.45

32.3

42.0

50.0

 

Conference Board Consumer Confidence (Jun)

10.00

86.6

90.0

92.0

Wed 1st

Change in ADP Employment (Jun)

08.15

-2,760,000

+2,450,000

 

ISM Manufacturing Index (Jun)

10.00

43.1

49.0

50.0

 

Fed FOMC Minutes (9th – 10th Jun. Meeting)

14.00

Thu 2nd

Change in Non-Farm Payrolls (Jun)

08.30

+2,509,000

+3,000,000

+5,000,000

 

Unemployment Rate (Jun)

08.30

13.3%

12.5%

11.5%

 

Average Weekly Hours Worked (Jun)

08.30

34.7

34.5

34.5

 

Average Hourly Earnings (Jun)

08.30

-1.0%(+6.7%)

-0.5%(+5.5%)

-2.0%(+4.3%)

 

Initial Jobless Claims (w/e 27th Jun)

08.30

1,480,000

 

International Trade (May)

08.30

-$49.4bn

-$52.0bn

-$54.0bn

 

Factory Orders (May)

10.00

-13.0%

+8.0%

+12.0%

Fri 3rd

Independence Day Holiday – Markets Closed

Selected future data releases and events

6th July

ISM Non-Manufacturing Index (Jun)

10.00

 

10th July

Producer Prices (Jun)

08.30

 

29th July

Fed Policy Announcement

14.00

 

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

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

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

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

2020

2021

2022

GDP

-5.0

-30.0

+18.5

+21.5

+8.0

+5.0

(-5.5)

(+7.0)

(+3.3)

CPI Inflation

(+2.1)

(+0.4)

(+0.9)

(+0.8)

(+1.0)

(+2.5)

(+1.1)

(+1.8)

(+1.9)

Core CPI Inflation

(+2.2)

(+1.3)

(+1.0)

(+0.9)

(+0.8)

(+1.7)

(+1.4)

(+1.5)

(+1.8)

Unemp. Rate (%), Period Ave.

3.8

13.3

10.7

8.7

7.0

6.6

9.1

6.5

5.8

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 (%)

0.70

0.75

0.85

1.00

1.00

1.00

1.00

1.00

1.00

S&P 500, End Period

2585

3100

3150

3300

3300

3350

3300

3500

3750

$/€, End Period

1.08

1.12

1.15

1.20

1.20

1.20

1.20

1.20

1.20

¥/$, End Period

110

108

109

110

110

110

110

110

110

Sources: Refinitiv, Capital Economics


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