US election – preview

Presidential race – state of the race

Betting markets are forecasting a close race for the presidency, with Trump being a slight favourite, but the race could still go either way (see figure 1):

Kamala Harris is currently leading in national polls by 1.4% (see figure 2) and is thus likely to win the popular vote on election day (68% probability according to FiveThirtyEight). 

That said, winning the popular vote is no guarantee to winning the US presidency as the president is elected by the Electoral College. Republicans currently have a slight advantage in the Electoral College, according to many political experts. Indeed, Hillary Clinton lost the Electoral College in 2016 despite winning the popular vote by 2.1%. Joe Biden won the popular vote in the 2020 election by 4.5%, but only won Wisconsin, the tipping point state, by a margin of 0.6%.

Currently, 22 states or districts, representing 226 Electoral College votes are rated as Lean, Likely or Solid Democrat by the Cook Political Report, an independent US political analyst. In contrast, 27 states or districts, representing 219 Electoral College votes are currently rated as Lean, Likely or Solid Republican by the Cook Political Report. There are seven swing states. Three of these swing states, Wisconsin (10 votes), Michigan (15 votes) and Pennsylvania (19 votes), are in the Midwest and tend to vote in a similar way. They are the states that gave the victory to Donald Trump in 2016. Currently, these states seem to offer the easiest path to victory for Kamala Harris. Were she to win all Midwestern States, she would almost certainly secure enough electoral votes to win the presidency. She is currently in the lead in two out of three states, though well within the margin of error (see figure 3).

Another path to victory for Kamala Harris would be through the so-called Sunbelt states, namely Georgia (16 votes), North-Carolina (16 votes), Arizona (11 votes) and Nevada (6 votes). These states also tend to vote alike as they have higher shares of non-white voters than the Midwestern states. However, this path to victory will be harder for her as Donald Trump is currently leading the polls in most Sunbelt states (see figure 4).

In contrast, Donald Trump needs to win a combination of Sunbelt and Midwestern States, given the lower number of Electoral College Votes currently in the Republican column. Overall, the Midwestern state Pennsylvania is seen as the key battleground state. There is 25.5% chance that Pennsylvania is the tipping point state this election cycle according to FiveThirtyEight. It is also notable that betting markets give Republicans better odds of winning key battleground states (see figure 5). Large trading positions by a few major players might explain this divergence.

Congress elections – state of the race

Aside from the presidential race, elections to Congress will also be of huge importance. In the US House, Democrats and Republicans have equal chances to gain control, as control of the House is relatively closely correlated to the national popular vote (see figure 6). In the Senate, things are different. The Senate consists of 100 senators (2 per state), with the vice-president casting the tie-breaking vote. Senators are appointed for 6 years and thus only a third of all US senators are up for reelection this cycle. Democrats currently have a 51-49 majority in the Senate. However, in the current election cycle, Democrats have to defend three seats in solid Republican states. They also have to defend seats in five out of seven battleground states. That said, Democratic senate candidates are currently outperforming Kamala Harris in state polls. Democrats’ “best” pick-up opportunities lie in flipping Nebraska, Texas and Florida, which lean Republican. Overall, Republicans currently have an 85% probability to capture control of the US senate, according to Polymarket, a betting market.

Looking at overall control of government (see figure 7), Kamala Harris is much more likely to face a divided government than Donald Trump, if she were reelected.

US election – economic impact

The US election will obviously have a major impact on the US and global economy. We’ll assess the candidates’ views here on a range of economic topics.

US debt

US debt sustainability is becoming a gradually increasing problem. Indeed, US debt (non-consolidated) reached a record 122% of GDP in 2023. With the deficit estimated to reach 6% of GDP this year, the debt ratio is likely to keep growing. The CBO expects the federal debt to GDP ratio to increase by 23 percentage points over the next ten years. Neither candidate is likely to bring the deficit down. On the contrary, both candidates have an agenda that would further enlarge the deficit. Donald Trump seems to be the most profligate. His plans would increase the deficit by an estimated 4 trillion USD (14.6% of current GDP), according to the Penn Wharton Budget Model and to 7.5 trillion USD according to Committee for a Responsible Federal Budget. This would be mostly through tax cuts. He would extend the tax cuts passed in 2018, lower corporate income taxes to 15% and eliminate taxes on social security benefits and tips. Only his planned tariffs would lower the US deficit (see further). Kamala Harris would only increase the deficit by around half the size (see also our opinion of 11 September). This would mostly be in the form of tax cuts and subsidies for the middle class, such as housing subsidies, increased child-tax credits and earned-income tax credits. She would only partially compensate for this by raising taxes on corporations and Americans earning more than 400k a year. That said, in the case she would face a Republican Senate, it might be harder for her to pass her budget plans.

Free trade

The US has taken a protectionist turn since Donald Trump’s first term. He pulled the US out of the Trans-Pacific Partnership trade agreement and launched major trade conflicts, not only with China, but also with allies such as the European Union. Customs duties almost doubled during his first term as a result (see figure 8). Joe Biden kept most of Trump’s tariffs in place and even increased tariffs on several Chinese imports including semi-conductors, solar-cells and electric vehicles (see also our opinion of 16 May). He also banned exports of “critical” technologies, such as semi-conductors. He also passed three major bills (on infrastructure, chips and climate) which mandate around 1.7 trillion USD in subsidies over a period of ten years (including ‘Buy American’ Provisions). The protectionist turn taken by the US has damaging effects. It increases prices for consumers, hurts competitiveness and productivity and creates an uncertain investment climate.

Donald Trump plans to raise trade barriers even further in a second term. He vowed to increase tariffs on all imports to 20% and on Chinese imports to 60%. These plans would have a major stagflationary effect, costing the average household an average 4000 USD a year according to The Economist. Kamala Harris, in contrast, criticized Trump’s tariff plan, calling them a sales tax in the debate. That said, she is no strong proponent of free trade either and is unlikely to unwind the tariffs and subsidies that her predecessors put in place.

Migration

Migration is an important issue for voters in this election. Indeed, according to Pew Research, a major pollster, 61% of voters see immigration as very important to their vote. That’s why both candidates vow to tighten the flow of migrants at the US-Mexico border, though Donald Trump’s rhetoric is harsher. That said, there is a significant difference in how both candidates would deal with undocumented immigrants already living in the US, who make up approximately 5% of the US workforce. Donald Trump has vowed to deport them from the US. If he were to succeed, that would cause severe labour shortages in sectors such as hospitality, construction and agriculture and have a major stagflationary effect. In contrast, Kamala Harris plans to offer undocumented immigrants a pathway to citizenship. This reform would allow undocumented immigrants to move to higher paying, more productive jobs and will increase their consumption and investments. That said, both candidates would have a hard time to realize their plans. Donald Trump’s deportation plans would need strong cooperation of foreign governments and local law enforcement (often controlled by Democrats). Meanwhile, Kamala Harris’ proposal is likely to face obstruction in the US Senate.

Conclusion

The US election is razor-tight. Republicans have a slight advantage to gain the Presidency and an equal chance to maintain control of the US House, but they have a high chance to gain control of the US Senate. These elections could have a major impact on the economy, as both candidates have major economic differences on a.o. trade, migration and government spending. Overall, Donald Trump’s agenda could have a more stagflationary impact and could make the US debt more unsustainable. Furthermore, as we highlighted in our research report of January, Donald Trump’s reelection would heighten geopolitical risks and could pose a risk the independence of the Fed and other institutions.