will the us election trump the economy in 2017?

Will the US election trump the economy in 2017?

Rupert Seggins, RBS Economics, July 20161

Information classification: Public/Internal/Confidential/Secret 2

Summary

While this time may be different, history suggests that the bar for a President-caused US recession in 2017 is set much higher than may

commonly be thought.

• The main thing to watch for that would precipitate an immediate recession is a significant and simultaneous monetary & fiscal tightening. This requires more than just the President to accomplish.

• Other policy options either won’t cause a recession (e.g. increasing tariffs on Chinese goods), are not very plausible (e.g. President causes a banking crisis) or are just not going to happen(e.g. start a war, lose & get invaded).

• As far as the economy and financial markets are concerned, years following US Presidential elections are not so different from other years.


• Post election years look similar to other years*, both in terms of average growth and the frequency of GDP falls.

• If the economy grows in the year prior to an election, it normally does the same in the following year. A change of party makes no difference to this pattern.

• There is one post-war in which a growing economy in the year before November turned to recession – 1948. However, this was not precipitated by policy.

US election years – not so different…

*Note: significance or otherwise of differences in frequencies of GDP falls established by chi-squared test at 5% significance level. Significance of average growth difference by t-test at 5% level.


• Household consumption follows existing trends. There is no post-war example of consumption peaking in an election quarter.

• Investment is also little affected by elections. The two post-war cases where the election quarter was the peak were 1948 and 2000 (the latter coincided with the Dot-Com bust).

• No sector of the economy typically does significantly* better or worse in a post election year than in a normal year. The apparently significant difference for finance disappears if we exclude 2008/9.

…and nothing significantly changes for any sector

*Note: significance or otherwise of average growth differences established by t-test at 5% significance level.


• There is no typical path for exchange rates or the stock market pre or post elections. Averages are misleading.

• Post-WWII election months coincided with stock market peaks in 1968 & 1972. In both cases, there was a sharp rise in the Fed Funds rate.

• The dollar has fallen in the year after 5 out of the 13 elections since 1964. Longer-term annual data (from 1792) suggests a meaningfully higher post-election frequency of dollar appreciations vs. sterling (70% vs 50% for other years). But this should be interpreted with caution, as some years may be due to sterling weakness.

Financial markets are as unpredictable as ever


• Whether coincidence or otherwise, the unemployment rate has taken a pause in and around a third of all post-WWII elections. Examples include 1964, 1984, 1996 & 2004).

• Real median family incomes fell during some presidential terms that saw a recession. For example, Reagan’s first term (-0.2%) & Bush Sr.’s presidency (-2.9%).

• But owing in part to globalisation and technological change, recent income falls have gone beyond single presidents. They have fallen during both Bush Jr. terms (-3%) and the six years of Obama for which we have data (-1.5%).

Unemployment pauses and longer term income troubles


• Across all G7 countries there is not a significant difference between average GDP growth in post-election and other years.

• France’s economy has seen the most GDP falls since 1871, but even there, the frequency of annual economic contractions is not significantly different between post-election & other years.

• Elections can and sometimes do lead to high levels of uncertainty about policy. Big monthly increases in uncertainty have more often not been election-related.

The experience of other G7 economies – guess what? The same.

Note: significance or otherwise of differences in frequencies of GDP falls established by chi-squared test at 5% significance level. Significance of average growth difference by t-test at 5% level. Data for uncertainty chart sourced from Baker, Bloom & Davis (2016), available at www.policyuncertainty.com


House prices & stock markets across the G7

• House price downturns are uncommon. The UK and Germany are the only two G7 countries since 1975 that have seen rising prices before the election turn to falling prices just after (2010 for the UK and 1983 & 2005 for Germany).

• As might be expected, Canada’s stock market has typically had the highest correlation with the US. However, there is still no typical difference between the years before and after US elections and other years.


• Typically, the consumer is the backbone of economic resilience. Post election falls are uncommon (10 out of 84 post-war elections) and reversals from growth to decline rarer still (5 out of 84)

• Unsurprisingly, investment has been more volatile with falls in advance of around 1 in 3 elections and falls following 1 in 4 elections.

• Manufacturing and construction output are typically more volatile than service sector output.

• All of the above is also the case in years that are not post-election ones.

Election years - all eyes on the consumer


• Given that US elections typically don’t coincide with recessions, it is not surprising that historically there is little coincidence with a downturn in world growth. However, this is not to say that US recessions don’t influence world economic growth (e.g. 1981/2 & 2008/9).

• There is also no significant* difference for world trade, although here it is more likely because things like US tariff policy decisions have historically taken time to debate and pass (e.g. 1828 Tariff of Abominations, McKinley 1890, Smoot-Hawley 1930).

Global economic & trade growth

*Note: significance or otherwise of differences in frequencies of falls established by chi-squared test at 5% significance level. Significance of average growth difference by t-test at 5% level.


• There is little evidence from US history that raising tariff barriers has in and of itself precipitated an immediate economy-wide recession. There is evidence that it creates winners and losers within the country (e.g. producers in different parts of the country as in 1928). It also hinders longer-term growth potential.

• Despite the oft-quoted Smoot-Hawley tariff and subsequent response from other nations, net trade contributed little to the US Depression and recovery. Employment and earnings falls were no greater in agriculture and manufacturing (where the tariffs applied) than in other sectors.

Elections, protectionism & recessions


Fiscal tightening (when accompanied by monetary tightening).

• E.g. UK in 1980, US in 1937/8, Italy 2011/12. Usually done in response to high inflation or debt sustainability concerns.

• In extreme circumstances, this type of policy action can precipitate a severe recession where GDP falls by between 4%-9% (e.g. US in 1938 and Italy in 2012).

• UK in 2010 is an example where fiscal tightening was sufficiently offset by accommodative monetary policy such that the economy did not fall into a recession, despite a fall in consumption.

What policy decision involving a President would precipitate an immediate recession?


• The majority of very severe recessions in G7 countries (4% to 9% fall in GDP) have been linked to a financial crash of some description.

• In order to cause a depression or worse starting in 2017 (>9% fall in GDP), G7 history suggests that the new President would have to either:

i. Start a war with another country and see the US invaded.

ii. Put the US on a fixed exchange rate standard and immediately cause a financial system crisis, while continuing to defend that standard.

For the extremists among you…


Some thoughts for 2017

• History suggests that the risk of an annual GDP fall in 2017 following the US election is no higher or lower than in any non-post election year.

• History also suggests that economic conditions coming out of the election will be similar to those going in.

• The main thing to watch for that would precipitate an immediate recession is a significant and simultaneous monetary & fiscal tightening.

• Most other policy options are either not going to cause a recession, too slow to act or are simply implausible.

While this time may be different, the bar for an immediate President-caused US recession is set higher than may commonly be thought.


@Rupert_Seggins

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will the us election trump the economy in 2017?

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