Divided government, stimulus anxiety and Covid-19

Today’s ADP jobs report makes plain that the US economy’s V-shaped recovery is moving toward the reverse radical section of the upturn. The question is whether politics and the Covid-19 crisis add to downside risk.

My view until now has been that the lagging and coincident data show a robust economy. With a large savings rate, there is potential pent-up demand that can keep the US economy going further for much longer. My main concerns have been the virus and the politics.

The election

Let’s get the politics out of the way first. The last time I did economic commentary on Real Vision’s Daily Briefing, I said that the scenarios that are not getting enough attention are the divided government ones (Oct 28 video here).

The level of support I saw for President Trump in rural Pennsylvania ahead of the election suggested to me that down ballot candidates had coattails all around rural and small town USA. There were Trump signs everywhere. And no Biden signs anywhere. And that meant a greater potential for a Trump win and/or a Republican Senate win. I think the results so far speak to this, at each of the Presidential, House and Senate levels.

Why? It’s speculative on my part. But I strongly feel like globalization and technological change have had a crushing impact on the working class, especially in small cities and rural communities. And to the degree the Democratic Party has focussed on the problems of the urban working class and poor, it has come at the expense of rural and blue-collar Americans. That’s the perception at least. This has left an opening for Trump and his populist message.

Moreover, as the standard bearer for a main party nominated by the party base and elected directly by the citizenry, Trump is in a unique position for a populist that only Labour’s Jeremy Corbyn has benefitted from. Most populists are thwarted by mainstream parties and must run as third party candidates. Trump has the Republican Party machine behind him now, despite its reluctance to support him in 2016. That’s a big benefit.

The economics of the election

If Mitch McConnell is returned as Senate Majority leader, the chances of a large stimulus package declines significantly, especially if Joe Biden wins the presidency. If Trump wins, despite divided government, the chances of a larger package increase as the Senate and President will be aligned. So, overall, from a 2021 stimulus-fuelled growth perspective, a Biden presidency and Republican Senate is the worst outcome and a Blue Wave is the best.

And I think this matters. ADP reported a net addition of 365,000 private sector jobs, well below consensus estimates for 643,000. This was also down from 753,000 in September. That’s a level of job growth that is incompatible with low unemployment. It guarantees a large swathe of people presently unemployed will remain so for a long time. The downshift into pedestrian job growth has, thus, already happened.

The question is what happens with the coronavirus. I believe we will see significant hospitalization and death rates as the fall and winter continue. And this will put a chill on economic activity, necessitating some level of government support to prevent a double dip recession. That pandemic outcome is what makes the politics critical in thinking about medium-term economic outcomes.

My take

I am not going to guess which way the election will go. But, right now it looks like Michigan and Wisconsin will go for Biden, making him President. Trump will take this to court though. So, we have a long way to go. And, risk assets will be more volatile while all of this is happening. Treasurys will benefit.

Eventually though, we will get a read on whether the Covid-19 situation has dented employment prospects. I think it will. And I expect to see this show up in jobless claims data by early December. Until then, I am still expecting the economic outlook in Europe to deteriorate into recession. The US is hanging on by a thread. From the early hours after election night, it seems as if the political situation won’t make it better.

That’s about all I have for today