How Will the Midterm Elections Affect the US Economy?

Ivanna Hampton: Higher costs and sticker shock have become a part of everyday life, and we’re bringing you a new segment on Investing Insights called Ask the Economist to simplify what’s going on. Morningstar’s Senior US Economist Preston Caldwell tracks the biggest trends, and he’s ready to answer this week’s question. Thanks for being here, Preston.

Preston Caldwell: Thanks for having me, Ivanna.

Hampton: The US midterm elections are coming up, where voters will elect members of the House and certain senators. This comes as food and gas prices are on the minds of many of them. Let’s talk about how the election and economy can intersect.

Caldwell: Let’s start with the scenario where the Democrats capture at least the House. Nate Silver is a forecaster that I highly respect, and his model puts a 90% probability on that happening. And obviously this could be wrong if the polls are wrong, but let’s run with it. What we’ve seen over the last 20 years is that divided control over government, where the president comes from one party and at least one house in Congress is controlled by another party. That tends to produce gridlock. That’s not to say that it’s entirely uneventful. We’ve had a number of debt-ceiling standoffs, most recently in 2023, which have seemed very worrying at the time. But at the end of the day, each of them was resolved with little sustained damage. So, what does gridlock mean? It means little, if any, major new legislation, so probably few big policy changes. And in that sense, there’s not really a lot to talk about in terms of the election on the overall economy because we’re mainly just talking about business as usual.

Hampton: As a follow-up, how can an election affect people’s personal economy?

Caldwell: When I say there’s not a lot to talk about in terms of the overall economy, it is true that for particular people, the election could have more impact at an individual level. For people who, let’s say, purchase their health plan on an ACA exchange, then the prospect of higher subsidies for those plans could be very impactful for those people. But just for the overall economy, it’s hard to envision the kind of changes under divided government that could move the needle.

Now, obviously, thinking about policy changes, some resolution of the US-Iran war that fully alleviated the constraints on oil and gas supply coming out of the Gulf, that could be very beneficial in terms of bringing down energy prices. But markets actually have been expecting that to happen, some sort of eventual resolution of the war, actually regardless of which party lands in control of Congress. And I actually do think that makes sense in the long run to me. So just to wrap things up, I would say elections can be important, but I do think that most people overrate the impact of them on the overall economy and financial markets relative to other drivers that emanate from outside of politics, like the rise of AI.

Hampton: Preston, thank you for joining me for Ask the Economist.

Caldwell: Thanks for having me. I enjoyed it.