DB - The Midterm Elections and Implications For The US Economic Outlook

Deutsche Bank
Research
The midterm elections and implications for

the US economic outlook
Brett Ryan, Matthew Luzzetti, Amy Yang,
Justin Weidner,
Senior Economist
(+1) 212 250 6294
[email protected]
October 2022
Distributed on: 07/10/2022 18:07:12 GMT
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 051/04/2021. UNTIL 19th MARCH 2021 INCOMPLETE DISCLOSURE
INFORMATION MAY HAVE BEEN DISPLAYED, PLEASE SEE APPENDIX 1 FOR FURTHER DETAILS.
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Since our last preview, the GOP advantage in the House has narrowed
slightly. Democrats are now slightly favored to win the Senate.
Source: FiveThirtyEight, Deutsche Bank

Deutsche Bank Ryan, Yang, Weidner, Luzzetti | (+1) 212 250-6294 | [email protected]
Research October 2022 1
Potential outcomes: Fiscal and regulatory policies are unlikely to
change near term under the two most likely scenarios.
Republican House / Democratic Senate < 60 seat majority
-Most likely scenario
-Total gridlock with no new legislation likely passing ahead of 2024 election
-Possible fiscal showdown if Republicans weaponize the debt ceiling – i.e. if Biden
signs an executive order forgiving student debt
Republican House / Republican Senate < 60 seat majority
-Next most likely scenario
-Gridlock on most issues as Biden would block most extreme GOP efforts
-Possible for agreements to be reached on increases to defense spending
The expiration of Trump tax cuts will be a huge issue for the 2024 election cycle
Source: CBO, Deutsche Bank

Deutsche Bank Ryan, Yang, Weidner, Luzzetti | (+1) 212 250-6294 | [email protected] 2
Research October 2022
Democrats currently have slim majorities in the House and Senate.
Source: Wikipedia, Deutsche Bank

Historically, the party of the President suffers at the midterms
-Since 1942, midterm elections have

resulted in an average loss of 27 seats in
the House and 4 seats in the Senate by the
party occupying the White House
-1998 and 2002 are outliers: In 1998,

Democrats gained 5 seats in the House
and lost 0 seats in the Senate despite
occupying the White House. In 2002,
Republicans gained 8 seats in the House
and gained 1 seat in the Senate
Source: Brookings Institute, Deutsche Bank

Biden’s approval rating is on par with Trump, Carter and Reagan at
this point in their Presidencies.

Republicans only need to flip four seats to win the House. However,
Republicans have more seats up for re-election in the Senate.
House
-Republicans must flip 4 seats currently held by Democrats to gain a majority *
-House members not seeking re-election: 38 Democrats, 27 Republicans
Senate
-35 seats contested: 14 Democrat-controlled, 21 Republican-controlled **
-Senate members not seeking re-election: 1 Democrat, 6 Republican
* Assumes party advantages for vacant seats/special elections

** Includes special election to finish Sen. Inhofe’s (R-OK) term
Source: Deutsche Bank

Follow the money: The two parties have raised a little nearly $2.5bn
combined. Dems have a slight advantage and slightly more on hand.
Source: OpenSecrets.Org, Deutsche Bank

Follow the money: Senate seats in battleground states tend to be
where donors focus their efforts.

Follow the money: Political campaigns are getting more expensive -
the 2020 election cost a staggering $14.4bn.

Democrats have recovered recently in the generic ballot and the two
parties are essentially even.
Source: FiveThirtyEight, Real Clear Politics, Deutsche Bank

Redistricting has given Republicans a greater advantage in the
House. “Hyper-competitive” seats are at a record low.
Source: Cook Political Report (https://www.cookpolitical.com/cook-pvi/2022-partisan-voting-index/introducing-2022-cook-

partisan-voting-index), Deutsche Bank
What are the forecasters saying? Cook Political Report expects
Republicans to take the House but much closer in the Senate.
Source: Cook Political Report (https://www.cookpolitical.com/ratings/senate-race-ratings), Deutsche Bank
What are the forecasters saying? Real Clear Politics sees similar
outcomes for the House and Senate.
Source: Real Clear Politics, Deutsche Bank

What are the forecasters saying? FiveThirtyEight predicts a
Republican House / Democratic Senate.

FiveThirtyEight model shows a significantly higher probability of
Republicans taking the House compared to the Senate.

Key Senate races to focus on are Nevada, Georgia, Pennsylvania,
Arizona and New Hampshire.

Races for Governor may be a bell weather for the 2024 Presidential
election. Can DeSantis win Florida by a larger margin than Trump?

The majority of Americans do not want Trump or Biden to run again in
2024.
Source: Yahoo News Survey June 27, 2022, Deutsche Bank
Views on Trump have not changed all that much.

The issues: It’s the economy, sort of?
High inflation is currently driving the misery index higher Views on gov’t policy less correlated with S&P500 more recently
% % % chg,
Misery index (ls) S&P 500 composite (ls) %
12q, AR
Consumer opinions about Govt economic policy: good job (rs) Consumer opinions about Govt economic policy: good job (rs)
24 50 30 50
Correlation= -0.48 Correlation=0.4
20 40 20 40
16 30 10 30
12 20 0 20
8 10 -10 10
4 0 -20 0
75 84 93 02 11 20 75 84 93 02 11 20
Dem sentiment surged post the 2020 election but now fading Government spending and taxes are usually the biggest complaints
Index Index Index Categorical US economic policy uncertainty index Index
Index of consumer sentiment
Q1-66=100 Q1-66=100 1985-10=100 Govt spending (ls) Taxes (rs) 1985-10=100
Independents Republicans Democrats 600 400
135 135
500
115 115 300
400
95 95 300 200
75 75 200
100
55 55 100
35 35 0 0
16 17 18 19 20 21 22 85 94 03 12 21
Source: BLS, University of Michigan, S&P, PolicyUncertainty.com, Haver Analytics, Deutsche Bank
The issues: The majority of voters disapprove of SCOTUS reversing
Roe v. Wade and they also think Congress can address it.
Source: YouGov, Deutsche Bank

The issues: In recent midterms, voter turnout among women has been
higher than that of men.
Source: Pew Research, Deutsche Bank

The issues: Mandatory spending will continue to rise as share of
GDP due to aging population. OMB sees taxes about 1ppt higher.
OMB projecting higher taxes relative to CBO baseline OMB and CBO projecting similar spending as share of GDP
% GDP CBO baseline as % of GDP: revenues, fiscal years % GDP % GDP CBO baseline projections as % of GDP: outlays, fiscal years % GDP
Federal receipts as % of GDP, fiscal years
20 20 Federal outlays as % of GDP, fiscal years
32 32
19 19
18 18 28 28
Correlation= 1.0
17 17 24 24
16 16
Correlation= 0.96 20 20
15 15
14 14 16 16
65 70 75 80 85 90 95 00 05 10 15 20 25 30 65 70 75 80 85 90 95 00 05 10 15 20 25 30
OMB projects lower deficits compared to CBO CBO projects discretionary spending to decline
% GDP CBO's baseline deficit/surplus as % of GDP, fiscal year % GDP % GDP CBO baseline as %of GDP, fiscal year % GDP
Federal surplus/deficit as % of GDP Mandatory spending Discretionary spending
4 4 24 Net interest
24
0 0 20 20
-4 -4 16 16
12 12
-8 -8
Correlation= 0.99 8 8
-12 -12 4 4
-16 -16 0 0
65 70 75 80 85 90 95 00 05 10 15 20 25 30 65 70 75 80 85 90 95 00 05 10 15 20 25 30
Source: CBO, OMB, Haver Analytics, Deutsche Bank

The issues: To put the “fiscal house in order”, taxes need to rise by
1.6ppts (as share of GDP) or benefit payments cut by 3.4ppts.
Source: CBO, Deutsche Bank

Event study of S&P 500 and 10-year yields in the 12 months before
and after the last 10 midterm elections – no clear patterns.
Republican Presidents: S&P500 performance pre- / post- midterms Republican Presidents:10-yr yield performance pre- / post- midterms
Index S&P500 (R) bps 10-year Treasury yield (R)

Oct 31 = 100
500
140
400
130
300
120
200
110
100
100
0
90
-100
80
-200
70 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12
-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12
1982 1986 1990 2002 1982 1986 1990 2002
2006 2018 Median 2006 2018 Median
Democratic Presidents: S&P500 performance pre- / post- midterms Democratic Presidents: 10-yr yield performance pre- / post- midterms
Index
Oct 31 = 100 S&P500 (D) bps 10-year Treasury yield (D)
140 200
130
100
120
0
110
100 -100
90
-200
80
70 -300
-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12
1994 1998 2010 2014 Median 1994 1998 2010 2014 Median
Note all S&P500 series indexed to October 31 and show month end close. 10-yr yield is basis-point change before / after October 31
Source: S&P, Treasury, Haver Analytics, Deutsche Bank
Event study of S&P 500 and 10-year yields in the 12 months before
and after the last 10 midterm elections – no clear patterns.
Presidents losing both: S&P500 performance pre- / post- midterms Presidents losing both:10-yr yield performance pre- / post- midterms
Index 10-year Treasury yield (Losing)
Oct 31 = 100
S&P500 (Losing) bps
300
140
130 200
120 100
110
0
100
90 -100
80 -200
70
-300
-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12
-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12
1986 1990 1994 1998 1986 1990 1994 1998
2006 2014 Median 2006 2014 Median
Presidents retaining at least one house: S&P500 performance pre- / Presidents retaining at least one house: 10-yr yield performance pre-
post- midterms / post- midterms
Index S&P500 (Winning) bps 10-year Treasury yield (Winning)

Oct 31 = 100
400
140
130 300
120 200
110
100
100
0
90
-100
80
-200
70
-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12
-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12
1982 2002 2010 2018 Median 1982 2002 2010 2018 Median
Note all S&P500 series indexed to October 31 and show month end close. 10-yr yield is basis-point change before / after October 31
Source: S&P, Treasury, Haver Analytics, Deutsche Bank
DB forecasts for US economy
Economic Activity 2022 2023 2024 2022F 2023F 2024F

(% qoq, saar) Q1 Q2F Q3F Q4F Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F Q4/Q4 Q4/Q4 Q4/Q4
GDP -1.6 -0.6 3.0 1.9 1.1 0.2 -3.2 -0.5 2.5 3.1 2.7 2.3 0.6 -0.6 2.6
Private consumption 1.3 2.0 0.9 2.1 1.6 1.3 -1.1 -1.0 0.5 3.0 2.7 2.3 1.6 0.2 2.1
Investment 5.4 -14.1 -3.6 2.8 -2.1 -6.5 -15.5 -1.1 15.1 6.5 5.6 5.0 -2.7 -6.5 8.0
Nonresidential 7.9 0.1 3.4 4.1 1.1 -0.8 -4.2 -3.0 3.7 4.0 5.0 4.3 3.8 -1.7 4.3
Residential -3.1 -17.8 -26.0 -7.5 -2.0 -1.0 -1.0 -1.0 2.5 2.4 2.6 2.7 -14.1 -1.3 2.5
Gov't consumption -2.3 -1.6 -0.5 1.8 3.2 1.2 1.2 1.2 1.1 1.1 1.1 1.1 -0.7 1.7 1.1
Exports -4.6 13.8 12.9 3.1 1.3 -2.0 -4.4 -3.0 2.4 3.5 3.5 3.5 6.0 -2.0 3.2
Imports 18.4 2.3 -9.0 5.0 2.1 -3.3 -5.0 -3.0 4.5 4.5 4.5 4.5 3.7 -2.3 4.5
Contribution (pp):
Inventories 0.2 -1.9 -0.5 0.2 -0.4 -1.1 -2.3 0.3 1.9 0.5 0.2 0.2 0.7 -0.7 0.3
Net trade -3.1 1.2 3.4 -0.6 -0.2 0.4 0.4 0.2 -0.5 -0.4 -0.4 -0.4 -0.6 0.2 -0.4
Unemployment rate,
% 3.8 3.6 3.6 3.7 3.9 4.3 5.2 5.6 5.5 5.2 5.0 4.6 3.7 5.6 4.6
Prices (% yoy)
CPI 8.0 8.6 8.3 7.2 6.0 4.2 3.9 3.9 3.5 3.3 3.1 2.9 7.2 3.9 2.9
Core CPI 6.3 6.0 6.3 6.2 5.6 4.9 4.4 3.8 3.5 3.2 2.8 2.6 6.2 3.8 2.6
PCE 6.4 6.6 6.1 5.3 4.6 3.5 3.5 3.4 3.1 2.9 2.6 2.5 5.3 3.4 2.5
Core PCE 5.3 5.0 4.8 4.9 4.5 4.3 4.0 3.4 3.0 2.7 2.3 2.2 4.9 3.4 2.2
Fed Funds 0.375 1.625 3.125 4.375 4.875 4.875 4.875 3.875 3.375 2.875 2.625 2.625 4.375 3.875 2.625
Source: Deutsche Bank

Brett Ryan - US Senior Economist
Brett Ryan is a Senior Economist at
Deutsche Bank covering both the
US and Canada. Brett is responsible
for high-frequency data forecasting
and frequently publishes research
on US and Canadian macro-
economic policy issues. Brett has a
Bachelor of Arts degree from the
University of Pennsylvania; majoring
in politics, philosophy and
economics.
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Research October
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DB - The Midterm Elections and Implications For The US Economic Outlook

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The midterm elections and implications for

Source: FiveThirtyEight, Deutsche Bank

Source: CBO, Deutsche Bank

Source: Wikipedia, Deutsche Bank

-Since 1942, midterm elections have

-1998 and 2002 are outliers: In 1998,

Source: Brookings Institute, Deutsche Bank

Source: FiveThirtyEight, Deutsche Bank

-Republicans must flip 4 seats currently held by Democrats to gain a majority *

-House members not seeking re-election: 38 Democrats, 27 Republicans

-35 seats contested: 14 Democrat-controlled, 21 Republican-controlled **

-Senate members not seeking re-election: 1 Democrat, 6 Republican

* Assumes party advantages for vacant seats/special elections

Source: Deutsche Bank

Source: OpenSecrets.Org, Deutsche Bank

Source: OpenSecrets.Org, Deutsche Bank

Source: OpenSecrets.Org, Deutsche Bank

Source: FiveThirtyEight, Real Clear Politics, Deutsche Bank

Source: Cook Political Report (https://www.cookpolitical.com/cook-pvi/2022-partisan-voting-index/introducing-2022-cook-

Source: Cook Political Report (https://www.cookpolitical.com/ratings/senate-race-ratings), Deutsche Bank

Source: Real Clear Politics, Deutsche Bank

Source: FiveThirtyEight, Deutsche Bank

Source: FiveThirtyEight, Deutsche Bank

Source: FiveThirtyEight, Deutsche Bank

Source: FiveThirtyEight, Deutsche Bank

Source: Yahoo News Survey June 27, 2022, Deutsche Bank

Source: FiveThirtyEight, Deutsche Bank

Source: YouGov, Deutsche Bank

Source: Pew Research, Deutsche Bank

Source: CBO, OMB, Haver Analytics, Deutsche Bank

Source: CBO, Deutsche Bank

Index S&P500 (R) bps 10-year Treasury yield (R)

Index S&P500 (Winning) bps 10-year Treasury yield (Winning)

Economic Activity 2022 2023 2024 2022F 2023F 2024F

Source: Deutsche Bank

Korea: Distributed by Deutsche Securities Korea Co.

Copyright © 2022 Deutsche Bank AG

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