Democratic clean sweep becoming more likely - Capital Economics
US Economics

Democratic clean sweep becoming more likely

US Economics Weekly
Written by Michael Pearce

The news that President Donald Trump has tested positive for coronavirus has raised the odds of not only Joe Biden winning in November, but of the Democrats sweeping Congress too.

The news that President Donald Trump has tested positive for coronavirus has raised the odds of not only Joe Biden winning in November, but of the Democrats sweeping Congress too.

Those braced for an October surprise did not have to wait long this election cycle. It is unclear when Trump contracted the virus or whether Biden was also exposed during Tuesday’s Presidential debate. At a minimum, the news undercuts Trump’s key campaign message on defeating the virus and reopening the economy. At a practical level, it will keep the President off the campaign trail for weeks. It seems unlikely that the Biden campaign will agree to a moratorium on campaigning.

The news comes just a few days after the first debate, which had already pushed Biden’s odds of winning in November back above 60%. Those odds now stand closer to 65%. (See Chart 1.) The chances of Democrats winning back control of the Senate and sweeping Congress also jumped on the news.

Chart 1: 2020 Election Betting Odds (%)

Source: PredictIt

The big problem for Trump is that, with vastly more people expected to vote by mail this cycle and voting already underway in many states – any turnaround in his chances may come too little, too late. Unless Trump starts narrowing the gap soon, Biden’s lead could prove insurmountable.

New forecasts

We discussed the various potential election outcomes and the implications for the economy in a webinar this week. If you missed it, you can catch up here. One key takeaway was that, with still few signs of a bipartisan fiscal relief package emerging this side of the election, a key upside risk for the economy is a large post-election fiscal stimulus. We think that would be more likely if Biden wins in November and Democrats win back control of Congress.

This week we also published our latest Economic Outlook. Our baseline scenario, which does not assume any further fiscal stimulus, is that a 3.8% decline in GDP this year will be followed by a solid 4.5% rebound in 2021. (See here.) But as we stressed in the piece – the risks in both directions are enormous. Together with the prospects for a post-election stimulus, the potential for a widespread vaccine next year is a key upside risk. On the downside, we could be set for another, potentially more severe resurgence of the virus in the winter months. Already the latest figures in the US show that cases are trending slightly higher, with hospitalisations and deaths no longer declining.

For now, the economic data released this week show activity grinding gradually higher – in line with our forecasts. Despite a 2.7% fall in incomes in August linked to the expiry of federal unemployment benefits, real consumption still rose by 0.7%. The slightly weaker 877,000 gain in private payrolls in September following a 1,022,000 gain in August also adds to the impression that the recovery slowed a touch further last month. But it does at least provide more confirmation that fears the economy would stall or be thrown into reverse by the expiry of Federal unemployment benefits at the end of July were overblown.

The week ahead

The President’s health and the implications for the election will remain the key focus into next week. Otherwise, the September ISM services index should remain at a solid level, the August trade figures will reveal a further widening in the deficit while the minutes of the Fed’s September FOMC meeting are likely to provide more insight into the introduction of its new forward guidance.

Data Previews

ISM Services Index (Sep.) 10.00 Mon. 5th Oct.

Forecasts

Previous

Median

Capital Economics

Headline index

56.9

56.3

56.0

Service index slips again in September

We think the renamed ISM services index (a.k.a the non-manufacturing index) dropped back slightly in September, but it remains firmly in expansionary territory.

The small drop in the index in August was little cause for concern given that it had arguably overshot the recoveries shown in the alternative regional Fed surveys and Markit PMIs (See Chart 2.) The former continued rising in September, while the flash Markit services PMI held broadly steady. Our model suggests that the ISM services index will edge down a bit again in September, to 56.0 from 56.9.

At that level, the index is consistent with GDP growth of around 3% annualised. That is far slower than the 30% annualised rise we expect in the third quarter, but much closer to the 4% or so pace we think growth will settle at in the fourth quarter. As such, the PMIs flattening out around this level seem consistent with the idea that the economy has entered a much slower pace of recovery, but that the rebound is not going into reverse.

Chart 2: Richmond Fed & ISM Services

Source: Refinitiv

International Trade (Aug.) 08.30 Tue. 6th Oct.

Forecasts

Previous

Median

Capital Economics

International trade balance

-$63.6bn

-$66.3bn

-$65.0bn

Imports still rising faster than exports

We expect a further widening of the trade deficit in August, as imports continue to rise faster than exports, with net trade likely to be a drag on third quarter economic growth.

The advance goods trade report showed the deficit rising to a record high $83.0bn in August, from $80.1bn, as exports rose by 2.8% m/m while imports increased by a faster 3.1%. The latter are being buoyed by a surge in consumer goods imports, which are now higher than they were a year ago. The advance report show US goods exports remain around 15% down from their levels a year ago across all the main categories, with only food exports holding up a bit better. We suspect that picture will improve over the coming months, as more US production comes online and demand overseas recovers. (See Chart 3.) The services data are unlikely to change the overall picture, with international travel still depressed. We are pencilling in a widening in the overall trade deficit to $65.0bn, from $63.6bn.

Chart 3: US Real Exports & ISM Export Orders

Source: Refinitiv

FOMC Minutes (15th–16th September Meeting) 14.00 Wed. 7th Oct.

Looking for more clarity on vague forward guidance

The minutes of the Fed’s mid-September FOMC meeting will be closely scrutinised for any hints on how far and for how long officials would be willing to let inflation overshoot the 2% target.

The post-meeting statement – which was the first issued by the Fed since the announcement of its shift to an average inflation targeting framework in late-August – included new language designed to strengthen the Fed’s forward guidance. Officials pledged to keep interest rates at their current near-zero level “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time”. But that leaves plenty of room for interpretation, with the deliberately vague “moderately” and “some time” presumably the result of internal disagreement within the FOMC.

The statement attracted two dissents, with Robert Kaplan of the Dallas Fed preferring to keep more flexibility on the rate outlook, but the dovish Neel Kashkari of Minneapolis wanting the Fed to go further and pledge not to raise rates until the inflation target is achieved “on a sustained basis”. The minutes should reveal whether other officials shared those concerns.

Otherwise, the Fed notably failed to apply that same guidance to its asset purchases, stating only that it will continue buying $120bn per month of Treasuries and MBS “over coming months”. Markets will on alert for any clues as to what might convince officials to ramp up or scale down those purchases further down the line.

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Release/Indicator/Event

Time EST (BST-5)

Previous*

Median*

CE Forecasts*

Mon 5th

ISM Services Index (Sep)

10.00

56.9

56.3

56.0

Tue 6th

International Trade (Aug)

08.30

-$63.6bn

-$66.3bn

-$65.0bn

JOLTS Job Openings Rate (Aug)

10.00

4.5%

Fed Chair Powell Speaks at NABE Annual Meeting

10.40

Wed 7th

Fed FOMC Minutes (16th Sep Meeting)

14.00

Change in Consumer Credit (Aug)

15.00

+$12.3bn

+$14.5bn

Thu 8th

Initial Jobless Claims (w/e 3rd Oct)

08.30

837,000

825,000

Vice Presidential Election Debate

21.00

Fri 9th

No Significant Data Released

Selected future data releases and events

13th Oct

Consumer Prices (Sep)

08.30

15th Oct

Second Presidential Debate (if not cancelled!)

21.00

16th Oct

Retail Sales (Sep)

08.30

Industrial Production (Sep)

09.15

Uni. of Mich. Consumer Confidence (Oct, Prov.)

10.00

3rd Nov

Presidential Election

5th Nov

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

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


Michael Pearce, Senior US Economist, +1 646 583 3163, michael.pearce@capitaleconomics.com

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