Dec 04, 2018

As the Midterm Election Dust Settles, What’s Next for Our Economy?

Although the midterm election took place back on November 6, it took three weeks for the final race for a seat in the House of Representatives to be called. After thousands of vote-by-mail and other late ballots were counted, Democrat candidate TJ Cox was declared the victor in a Central Valley district in California over incumbent Republican David Valadao on November 28.

Cox’s win means Democrats picked up 40 seats to flip the House, their biggest gain since the post-Watergate 1970s. The Republicans retained control of the Senate and Republican President Donald Trump still occupies the White House, but it appears the rumored “blue wave” showed up.

Of course, while the size of the Democrat sweep of the House is notable, the turn toward an opposition party was not unexpected. And, historically, a first-term president’s party does not do well in the first midterms. Still, the surge of Democrats in the House will have a significant impact on the United States economy and, therefore, all of us.

Major Legislation

Even though Republicans controlled both the White House and Congress since January of 2017, they have struggled to push through a comprehensive legislative agenda. The big exception was the bill overhauling the tax code passed late last year, but Republican attempts to repeal the Affordable Care Act or fund huge updates to American infrastructure fell flat.

Without a majority in the House, analysts believe that the Republicans will not have a major legislative victory for the rest of Trump’s first term.   

“Democratic control of one house of Congress means that the White House cannot expect to easily achieve major legislation over the next two years,” Dr. Ira Kalish says in a forecast for Deloitte. “The Republicans would like to make last year’s tax cuts permanent; this is now unlikely to happen.”

While Trump could strike deals with Democrats on spending projects like infrastructure, he would then have to sell the legislation to the Republicans on his right flank in the House and Senate.   

“As for spending, there will probably be no significant shift in the trajectory of spending, although it is possible that the two parties will agree to sustain high levels of spending that are currently set to decline in two years,” Kalish continued.

Stock Market

In the lead up to the 2018 midterms, the Dow Jones Industrial Average sank and wiped out nearly any gains it had made this year. Since November 6, the Dow has popped right back up. It surged 545 points the day after Election Day and jumped another 600 points on November 28.

Investors appeared to welcome the Democrat majority in the House as a check on Trump. In general, Wall Street likes stasis so political gridlock is viewed as a positive. Like we saw this year, the weeks of uncertainty before an election are usually bad for the Dow, but then the stock market almost immediately perks up after polls close.  

“While stock market strategists had generally opined that continued GOP control would be the best outcome for the Dow Jones industrial average, S&P 500 and Nasdaq, history suggests otherwise,” posited Jed Graham of Investor’s Business Daily. “So does the threat of an escalating China trade war.”

Trade Agreements

Over the past year, Trump has pushed to renegotiate global trade agreements or implement huge new tariffs on imported goods. These trade actions, which have been criticized by both Democrats and Republicans, brought the world to the brink of a global trade war.

Considering that Trump was able to impose some tariffs even with a Congress hostile to the idea, the White House seems to be poised to continue to seek more. Soon after the midterms, the Trump administration was reportedly looking into taxing almost all cars imported into the U.S.

Many industry groups and politicians have criticized the tariffs, saying the costs will be passed down to consumers.

“Higher auto tariffs will harm American families and workers, along with the economy,” Jennifer Thomas, the vice president of automaker lobby Alliance of Automobile Manufacturers, said in a statement.

Tax Policy

In a surprising twist considering the health of the economy, exit polls showed that only 22% of midterm voters viewed the economy as their top priority. Additionally, roughly 45% of respondents said that the 2017 tax cuts had little impact on their finances. Instead, 41% said their top priority was health care.

Since a divided Congress will not likely pass another huge bill overhauling the tax code in the next two years, tax policy is unlikely to change in any significant way in the near future.   

“We expect no major tax legislation to become law under a divided Congress,” Goldman Sachs economist Alec Phillips wrote in a note to clients after the election. “Our projections of the growth impulse from fiscal policy assume no substantial tax changes will be enacted over the next few years, and the election result should not change this assumption.”

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About the author

Barry Eitel
Barry Eitel has written about business and technology for eight years, including working as a staff writer for Intuit's Small Business Center and as the Business Editor for the Piedmont Post, a weekly newspaper covering the city of Piedmont, California.

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