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'The economy is the backdrop to the election'

Interview: Chris Cottrell
November 4, 2014

Midterm elections in the US will have few implications for the American economy, Gus Faucher, a senior economist with PNC Financial Services Group, tells DW. Markets have already priced in a Republican win in the Senate.

https://p.dw.com/p/1DgLp

DW: Mr. Faucher, how big a role has the economy played in the run-up to this election?

Gus Faucher: I think the economy is the backdrop to the election. We're not in recession, so that's not a concern, and the economy is getting better, but people generally remain disappointed with the pace of the recovery. Incomes adjusted for inflation really haven't gone anywhere over the past six or seven years.

We are adding jobs at a pretty decent clip and the unemployment rate is falling. The unemployment rate was down to 5.9 percent in September and that's pretty good, but it understates the amount of slack there is in the labor market.

You have people who are working part-time who would like to be working full-time, you have people who are college graduates who would be taking jobs filled by high-school graduates, and we have a lot of people that dropped out of the labor force during the recession and haven't come back in.

So, the labor market isn't as good as that 5.9 percent unemployment rate would suggest. Given all of that, I think voters…would like to see more progress, and I think that's one of the things hurting the Democrats' chances.

What are the specific challenges facing the US economy at the moment? Is there anything weighing on growth?

Gus Faucher
Gus FaucherImage: PNC

I'd argue that the weights on growth this year are a lot less than they've been during most of the years of the recovery. The recovery, according to the National Bureau of Economic Research, started in 2009, but we've had a number of factors that have dragged on growth.

We've had a second recession in Europe, for example. Consumers had to repair their balance sheets, so even when the economy was adding jobs, consumers were cautious with their spending. We had state and local governments that, because of balanced budget requirements, were cutting back on their spending. We had the fight over raising the debt limit that made financial markets uneasy. We had in 2013 the spending cuts under the sequester. We had the government shutdown. The spending cuts were a drag, the government shutdown raised uncertainty. You had the Fukushima disaster in Japan, you had floods in Thailand - those were concerns.

In the beginning of 2013, you had the increase in personal income tax rates, you had a return to the social security payroll tax to its previous level, so that jumped up by two percentage points, you had the increase in the payroll tax to pay for the Affordable Care Act and then you also had implementation of the Affordable Care Act.

So you had all these factors that have dragged on the recovery and I think that's why the recovery from 2009 to 2013 was disappointing. Then at the beginning of this year, you had very bad weather in much of the country that delayed construction projects, weighed on output and caused workers to miss days. That was why we had a contraction in the first quarter in the US.

But you'll notice that since then, growth in the second and third quarters has been pretty good. And growth in the fourth quarter looks like it's going to be pretty solid. So I think the point is not that the factors are restraining growth in 2014, but that they restrained growth through most of the recovery. Those factors have largely lifted and growth now looks like it's picking up, but I think given that backdrop of four years of subpar growth during the recovery, that has been the biggest weight for Democrats to overcome.

You have argued that the economic implications of a Republican victory in the Senate would be the same as a Democratic one - why?

We already have divided government in the US. The Republicans already control the House, the Democrats control the Senate, and then obviously President Obama is a Democrat. So anything that gets past Congress at this point, before the election, needs to get approval from the Republican House and the Democratic Senate and the universe of policies that fit that bill is pretty small.

Even if Republicans take control of the Senate, you still got to have it signed into law by President Obama, who is a Democrat. So, still you have to come up with that agreement between the parties and,again, the universe there is pretty small.

I think we'll get some sort of budget that preserves a status quo, but the idea that we're going to get a big agreement on something like tax policy or immigration or changes to the Affordable Care Act is pretty minimal, but then I think the likelihood of that happening was pretty minimal beforehand. So I don't think that if we have a switch from the Democrats to the Republicans in the Senate, as looks likely, it's not going to make much of a difference compared to what the status quo is now.

The chair of President Obama's Global Development Council, Mohamed El-Erian, recently wrote an op-ed for the Financial Times lamenting the "polarization and dysfunction paralyzing Congress." He said it was therefore a question of whether companies and individuals can "decouple even more forcefully from yet another 'do-little' Congress." Do you agree?

I think dysfunctional is a good way to describe things. That being said, I think the status quo is conducive for growth. Now that we've gotten through all of these policy issues and we're not likely to have any more government shutdowns, we've raised the debt limit and it looks like there is a status quo that is supportable in the near term.

Businesses know what to expect, so I think the conditions are pretty favorable. Consumer balance sheets are in very good shape and consumers have room to increase their spending. And we see strong job growth of 200,000 [new jobs] per month. Business balance sheets are in great shape, so businesses are highly profitable.

Interest rates remain very low. We do see a greater willingness to lend on the part of banks. Global growth, although it slowed somewhat and there are concerns about Asia and Europe, I think is positive.

I think given all of that, the backdrop is favorable and I think businesses can certainly live with the status quo that we have now. We have seen business investment pick up this year. I think we'll see continued gains in consumer spending. So I think the backdrop is generally favorable for growth throughout 2015. And again, it doesn't make any difference whether it's Republicans or Democrats in control of the Senate.

DW: Why is no market reaction expected from this election? Is a Republican victory in the Senate viewed as a foregone conclusion?

Markets have already priced in a Republican victory in the Senate. And I don't think it makes much difference for economic policy, for the economy overall, whether its Democrats or Republicans in charge of the Senate…If we think markets are forward-looking, again what we're likely to see is a continuation of the status quo and that's already baked into the markets.

I think from the market standpoint, we have seen a lot of volatility lately. What's more important is what's going on in Europe and then what happens with monetary policy - with what the Federal Reserve is doing.

Augustine (Gus) Faucher is vice president and senior macroeconomist of The PNC Financial Services Group.

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