US Strategy Weekly: Elections Mean Change

Global Elections

One in three Democrats think US President Joe Biden should end his reelection bid after last week’s cringe-making debate against Republican Donald Trump. However, Biden disagrees, and maybe he is right, because according to a Reuters/Ipsos poll disclosed this week, no prominent elected Democrat does better than Biden in a hypothetical matchup against Trump. Still, last week’s presidential debate may have been a turning point in the 2024 election. Not surprisingly, markets are looking at what a change in the Oval Office could mean for companies, stocks, inflation, and interest rates.

Most prognosticators are pointing to higher inflation as a result of a Trump victory. So, we checked. This view ignores the fact that during Trump’s presidency monthly CPI data averaged 1.9% from the end of 2016 to the end of 2020. More surprisingly, GDP growth averaged 2.44% in the same period despite, and including, the Covid-inflicted recession in early 2020. This growth rate was actually higher than 2.0% average quarterly GDP growth rate seen during the 8-year Obama administration. Surprised?

The reason many economists are worried about inflation is that Trump imposed significant tariffs on China during his presidency and “tariffs are inflationary.” Moreover, the Tax Foundation issued a report on June 26, 2024 on the impact of the Trump-Biden tariffs. They coined it the “Trump-Biden Tariffs” because Biden kept most of Trump’s tariffs in place during his term and announced $18 billion more tariffs on Chinese goods in May 2024. According to the Tax Foundation, “the Trump administration imposed nearly $80 billion worth of new taxes on Americans by levying tariffs on thousands of products valued at approximately $380 billion in 2018 and 2019, amounting to one of the largest tax increases in decades.”

These are imputed tax increases estimated by the Tax Foundation that assume Chinese tariffs would be passed on as price increases to US consumers. But actual history shows that in many cases, they were not, and the Chinese government subsidized their exporters. The Foundation also estimates there would be a loss of consumer choices, a loss of jobs, and a loss of trade as a result of tariffs. But we disagree. What did happen is that other Asian countries such as Viet Nam, Thailand, and Cambodia, became new sources of goods for US consumers and this buoyed these Asian economies. They also underestimated the fact that small US businesses picked up the slack when Chinese imports became more expensive for US consumers. What is also being ignored is that the revenue from these Chinese tariffs go straight to the US Treasury which helps to balance the budget and could therefore lower the need for revenue (i.e., new taxes). And to the extent that tariffs reduce Chinese imports (which is a negative to GDP), it would thereby increase GDP. In our view, the Tax Foundation is only looking at one side of the coin, ignoring that we live in a dynamic global economy, and is making assumptions that simply did not occur. And finally, most tax-payers would agree that taxes were lower under the Trump administration. In short, we suggest you do not believe everything you read, even from the “experts.”

In Europe, Marine Le Pen’s National Rally (RN) far-right anti-immigrant Euroskeptic party scored historic gains to win the first round of France’s parliamentary election this the weekend. This means that President Emmanuel Macron’s gamble on calling for a snap election backfired since his centrist camp came in at a lowly third place behind the RN and a hastily formed left-wing alliance. Pollsters calculated after the first round of voting that the RN is on track for anything between 250-300 seats in a race in which 289 seats are needed for a majority. However, that was before the tactical withdrawals and cross-party calls for voters to back any candidate that is best placed to defeat the local RN rival. In short, politics is chaotic in France. Moreover, the RN party has very different opinions on European politics, and this could put the Eurozone, and the European economies, in turmoil.

The UK also has a parliamentary vote later this week, and if polls are correct, the ruling Conservative party will be replaced by the centrist Labour Party, currently led by Keir Starmer. Starmer is running on a platform of economic stability, which is an attractive concept to British voters after Conservatives ran through five prime ministers in eight years. The disastrous six-week premiership of Liz Truss demolished what was left of the Conservative party’s claims to competent economic management. More importantly, Britain’s economy continues to struggle in the aftermath of Brexit and Covid. But financiers in the City of London are said to be privately optimistic about a change of administration since a large majority will allow Starmer to make necessary long-term decisions and resist pressure from his party to boost government spending. It is worth noting that the issues driving elections in Europe are immigration, the economy, and soaring federal debt, just like at home.

The US Economy

We review recent releases on housing, personal income, wages, personal expenditures, the PCE deflator, and the ISM indices this week. The standout data for us in housing was the pending home sales index, which fell 1.5 points to 70.8, in May, the lowest level since the index began in 2018. This is not good news for the future of residential construction which fell 19.3% YOY in May, to 1.277 units. Single-family housing starts were marginally better, falling only 1.7% YOY. New permits for housing also fell 9.5% YOY, but single-family housing permits rose 3.4% YOY. Overall, these are signs that the housing sector is slowing. See page 3.

Despite the fact that new home sales were down 16.5% YOY in May and total existing home sales also fell 2.8% YOY, home prices were strong. The average price of a newly constructed home was $520,000 in May, up 2.2% YOY and the median price was $417,400, off slightly by 0.9% YOY. The median price of an existing single-family home hit a record $424,500 in May, up 5.7% YOY, or 6.8 times disposable income per capita. The record for home prices to DPI per capita was 7.55 times set in June 2022. See page 5.  

Personal income increased 4.6% YOY in May. Disposable income increased 3.7% YOY and personal consumption expenditures increased 5.1% YOY, or slightly above the long-term average of 5.0%. The recent strength in consumption appears unsustainable over the longer term. See page 6.

We noticed an interesting trend in consumption and inflation. Healthcare represented less than 5% of PCE in 1960 but has grown to be the second largest expenditure after housing (17.8%) and now is 16.6% of PCE. In 2023, healthcare pricing was negative or benign. But in May, healthcare, which represents nearly 8% of the CPI, saw prices rise 3.1% YOY. More importantly, healthcare prices tend to rise in the fourth quarter of the year when healthcare insurers set pricing for the upcoming calendar year. This could be a handicap for the CPI and consumers in the second half of 2024. See page 8. The ISM manufacturing index for June fell from 48.7 to 48.5; however, all but one category of the index was above 50 (prices paid 52.1) and all but one category of the index declined in June. New orders rose from 45.4 to 49.3 in the month. Employment fell from 51.1 to 49.3. See page 9. The ISM service sector survey will be reported later this week[AC1]  and it will be important since services represent 70% of consumption, and housing and manufacturing appear to be slowing.

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