The US primaries will end in June, and the national conventions to select the two main candidates will take place in mid-July. The month of March, however, marks a key turning point in the election season: the number of candidates in the running is declining, and polling organisations are able to accurately predict the outcome of the primaries. Since 1992, the University of Iowa poll has correctly picked the two presidential candidates as early as March. This poll shows that Donald Trump (79% probability) and Hillary Clinton (82%) will be crowned (see charts below).
Apart from the eventual candidates, we are interested in how different components of the US economy will behave both during and after the election.
1. When it comes to monetary policy, the Federal Reserve (Fed) is, in theory, not affected by elections. We can assume that the Fed would prefer to avoid a major policy change during an election year, but the election calendar itself will not influence the Fed’s decisions. Since 1964, the number of monetary policy tightening and loosening cycles during election years have been about equal. And since 1980, the Fed’s interest rates have never veered from the optimal interest rates based on the Taylor rule, an indication that the Fed does not intentionally ease monetary policy during elections.
2. In broader terms, the economy is mainly affected by ‘political uncertainty’. This sentiment is lasting longer than usual, owing in part to unpredictability in the Republican party’s nomination process. In theory, these periods of uncertainty can weigh on the labour market and corporate spending; they can also weaken both corporate and consumer confidence since future fiscal policy is up in the air. Empirical studies led by Goldman Sachs show, however, that the actual impact on the economy is difficult to discern.
3. The real economy will, however, be affected by what the candidates are saying. While the nominating races have focused more on the candidates’ rhetoric than on economic issues so far, a number of points are emerging:
• Taxes. Mr Trump and Mrs Clinton both want to put an end to tax inversion, a process by which a company moves its legal domicile to a lower-tax country by taking over a local company. Both parties have also proposed cutting taxes on the wealthiest.
• Trade. Changes to the Trans-Pacific Partnership (TPP) will be put forward. Both candidates recognise the need to oppose this agreement, since a number of states (such as Ohio, Wisconsin and Illinois) have been hurt by previous trade pacts, largely through massive job losses. The two candidates, but especially Mr Trump, would like to limit free trade and impose import tariffs in an effort to encourage domestic production and consumption.
• Public health. Health policy is another important issue for both candidates. Mrs Clinton has suggested ways to modify Obamacare, including a cap on out-of-pocket costs. While she is clearly in favour of building on the achievements of Obamacare, Mr Trump vehemently opposes the concept of universal health care. If elected, he will ask Congress to revoke Obamacare.
• Immigration. The candidates’ stances on immigration are diametrically opposed. Mr Trump is unequivocal in his call to close the borders to migrants. Mrs Clinton, on the other hand, would like to pick up where President Obama leaves off.
In reality, the president wields significant policy influence but, under current law, does not have a free hand to do as he or she pleases. A Clinton administration would probably not use its power much differently from the Obama administration. How a Trump administration will act, however, is the big question. Regardless of whether or not he is elected, Mr Trump’s success so far will affect the policies of whichever candidate finally gets the nod. His powerful comments on immigration, trade and increased spending have changed the way many Americans think.
In the end, the effect of the election on the economy in terms of monetary policy and political uncertainty is limited. But one thing appears certain: public spending is set to increase, despite the absence of policy details. And it will be financed by a corporate tax hike. If the Republicans win, military spending will increase; if the Democrats win, infrastructure budgets will grow. Two bills were recently approved by Congress under the Obama administration and will go into effect in the next two years: the highway bill, a 280 billion-dollar project to address urgent infrastructure-related needs (highways, bridges and traffic) in many US states; and an 80 billion dollar increase in federal spending for both defence and civilian programmes.
The rise in public spending will provide a healthy boost to US growth in the coming years against a backdrop of tightening monetary policy.