Why Trump Being the Underdog Is Promising for the Economy
A second Trump presidency is likely to unleash an explosion of economic growth that could surprise financial markets and officials at the Federal Reserve.
This conclusion arises from a reading of surveys of voters, consumers, and businesses in recent weeks that indicate that uncertainty around the election—or even the prediction of a Vice President Kamala Harris win—is holding back economic activity and that Trump and the Republicans are more trusted on economic issues.
Two months ago, Trump was clearly the favorite to win the election. The YouGov poll for the Economist in mid-July found that 52 percent of registered voters said Trump was likely to win. Harris was seen as the likely winner by just 31 percent of the public. The University of Michigan’s consumer sentiment survey taken in the three months through July 17 had 48 percent forecasting a Trump win and 44 percent forecasting a Biden win. CNBC’s survey of chief financial officers found in the second quarter of this year that 58 percent said Trump would win, and only 12 percent said Biden would win.
Each of those surveys now favors a Harris victory. The latest YouGov poll finds 40 percent of voters predicting Harris will prevail, with a Trump win at 35 percent. In the University of Michigan poll, 58 percent of consumers say Harris will win, and 34 percent say Trump will win. The CNBC CFO survey now has 58 percent saying Harris will win, and 31 percent forecasting a Trump victory.
On the surface, that sounds like bad news for Trump. But keep in mind that these surveys are not always the most predictive, especially the survey of chief financial officers. These executives have not generally obtained their positions through the powers of their political forecasting abilities. In the September 2020 poll, two-thirds said Trump would win and just a quarter said Biden would. In the September 2015 survey of CFOs, 78 percent said Jeb Bush would win the GOP nomination and none—zero—said Trump would win.
Consumers have done a bit better at predicting. Back in August of 2016, 69 percent of consumers predicted a win by Hillary Clinton and just 26 percent predicted a win by Trump. In 2020, however, consumers correctly predicted a Biden victory, with 48 percent saying they thought Biden would win and 47 percent saying Trump would win. Historically, consumers have a pretty good record of predicting the victory. The 2016 miss was a rare one.
The Upside Surprise of a Trump Win
But consumer expectations and CFO expectations also have an impact on the economy. The latest CFO survey finds 55 percent saying Trump would be better for the economy, even though they expect he is going to lose. Given that scenario, we would expect to find that CFOs would begin to pull back on investment plans in reaction to a rise in the prospects for a worse economic policy. And sure enough, the Federal Reserve Banks of Richmond and Atlanta recently found that nearly one out of three CFOs have postponed, trimmed, or canceled investment plans because of the upcoming election.
Similarly, most surveys of voters have found that Trump is seen as better on the economy than Harris. A recent Gallup poll, for example, found Republicans ahead of Democrats on the economy, with 46 percent saying the GOP is better and 41 percent saying Democrats are better. The University of Michigan survey found the opposite, with Harris ahead of Trump on economic issues, 41 percent to 38 percent, and tied on the question of who would be better for personal finances—but that has not been confirmed by other surveys.
What this means is that a Trump victory would count as an upside surprise for CFOs and consumers. In the immediate aftermath of the election, there would likely be a positive reevaluation of the prospects for the coming years that would trigger more investment, more spending, and greater economic confidence.
Does that sound familiar? It is exactly what happened in the aftermath of Trump’s unexpected win in 2016. The Index of Consumer Sentiment jumped from 87.2 in October, the final full-month reading before the election, to 98.2 in December, the first full-month reading after the election. This was the highest reading for the index since January 2004. An all-time record number of consumers spontaneously mentioned the expected favorable impact of Trump’s policies on the economy.
“When asked whether they anticipated more or less economic growth during the year ahead, 43 percent expected better economic conditions in early December, up from 31 percent last month and 21 percent last year,” Richard Curtin, then the director of the survey, said.
If Trump is able to once again upset the expectations of consumers and business leaders, it’s likely we will be looking at another Trump boom in markets and the economy.