The US election: Is there a “blue wave” coming?

How could blue-collar distress impact the US election outcome? Macro Strategist Juhi Dhawan considers several scenarios and the potential economic and market effects.

Views expressed are those of the author and are subject to change. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional or institutional investors only.

COVID-19 brought forth an unusual recession. While many recessions are associated with the withdrawal of capital from the economy, this one is about the displacement of a very large number of workers, and predominantly those in low-paying service industries who have been sidelined by the economic shutdown. The impact on blue-collar labor stands in stark contrast to the impact on highly skilled labor, which is seeing losses more typical of a recession.

This blue-collar distress has been met with large-scale support from the fiscal authorities thus far. But if the support falters as the shutdown continues (or as some states renew restrictions following a surge in cases), I would expect discontent to grow over time. Given that the demographic cohorts most impacted are largely affiliated with the Democrats (Figure 1), this could raise the odds of a “blue wave” of victories for the party in the upcoming election, and potentially a sweep of the White House and Congress. In this note, I’ll briefly outline the potential election outcomes and the implications for policy, the economy, and the markets.

FIGURE 1

Demographic cohorts hurt most by COVID-19

Keeping an eye on the blue-collar vote

As I wrote recently (“US recession and the fiscal imperative”), the nature of the current downturn and the ongoing malaise make redistributive fiscal policy most impactful. At US$2.9 trillion, the government spending thus far is large and the efficacy has been evident in the unusually strong level of activity, relative to other recessions, as reopening has begun.

To date, Congress has provided robust income support for some of the hardest-hit industries. Under the CARES Act, the average weekly unemployment benefit exceeded the average weekly earnings in retail, leisure, hospitality, transport, education, health services, and other service industries. A June study by the Congressional Budget Office estimated that if those benefits were extended through 31 January 2021, five out of six recipients would receive benefits that exceed the weekly amounts they could expect to earn in their jobs. As of this writing, Congress was wrangling over the details, but I expect an extension will come, though with some tapering of the benefits.

With the election approaching, the calendar demands that both parties demonstrate the types of policies they will pass if elected — and blue-collar workers will be watching closely. I expect they will find a lot to like in the proposals of the Democrats, who envisage a large infrastructure spending plan, including physical infrastructure but also green investments and broadband. Democrats are also emphasizing worker retraining, free community college, forgiveness/refinancing of student debt, and a higher minimum wage.

On a related note, I wrote recently  about another likely source of support for Democrats: the millennial generation, with its increasingly important role in the economy. This young and engaged cohort is particularly focused on social concerns including income and wealth inequality.

Weighing the implications of potential election outcomes

Of course, we are still months from the election and a lot can happen, especially with mail-in ballots an additional complication that may affect results. With that in mind, Figure 2  offers a summary of how policies could change under the various election scenarios, including the potential impact on different sectors. I’ve also included probabilities, as I see them, for each scenario. Let me highlight a couple of key points:

  • A sweep by either party would allow for more legislative action. In the event of a Democratic sweep, the legislative agenda would include higher taxes on corporations and on high-income earners. At the same time, the Democrats would, as I noted, seek to ramp up spending — on infrastructure, health care, and climate change, in particular. Importantly, I would expect the economic benefit of the spending to outweigh the harm of higher taxes, yielding a net positive effect for growth. At the same time, the tax hikes would hurt corporate earnings and likely be a headwind for some equity sectors (see Figure 2). I’d also note that the Democrats’ focus on fiscal policy would reduce dependence on monetary policy in coming years, implying that interest rates could start to normalize more quickly than the market currently anticipates.

In the event of a Republican sweep, the legislative focus would likely be on extending tax cuts, a net positive for growth and the equity market.

  • With divided government again, the path to change would be regulatory rather than legislative. A Biden administration would, for example, likely focus on pushing a green energy agenda via regulation, including reversing some of the easing of fracking rules approved by President Trump. On the executive side, Biden would also likely rejoin the Paris Agreement. For its part, a Trump administration would continue its support of fossil fuels. In the event of a split Congress, two likely areas of common ground would be a boost in infrastructure spending (though the specifics would vary greatly) and reduced dependence on China. The latter is also an objective that either Trump or Biden would likely pursue through executive-level changes. Aside from China, there could be some improvement in trade relationships with the rest of the world under a Biden administration.

FIGURE 2

Election watch countdown

In the remaining months leading up to the election, we will continue to monitor the six swing states — Arizona, Michigan, Wisconsin, North Carolina, Florida, and Pennsylvania — that are likely to decide the White House winner. We’ll also be watching key races in the Senate, where margins will determine the type of fiscal policy that can be enacted. But perhaps most important, we will be tracking support for additional stimulus from each party in Congress ahead of the polls. The impact on voters’ wallets in the coming weeks could be top of mind for many as they head to the ballot box.

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