Having new information as to who the next President of the United States will be and knowing the structure of the US Congress can shine some light as to the future of our economy.
Today, we have clear information as to who will serve the 57th term of the US Presidency. Clear victory by President Barack Obama eliminated uncertainty, provided him with a quick transition to the second term, and gave investors valuable information to base their investment decisions on. Barack Obama won on two counts: by electoral votes and by popular votes. He received 303 electoral votes vs. 206 votes received by Mitt Romney. Based on popular votes, Barack Obama has 2,896,869 votes more than Mitt Romney as of November 8th, 2012 (The Huffington Post, data provided by Associated Press).
Having Barack Obama as the President, increases the probability that Ben Bernanke will be reappointed as Chairman of the Fed in January 2014. If this happens, Ben Bernanke will be able to pursue the dual mandate of low unemployment and stable prices. Currently low short and long-term interest rates are very stimulative for the housing market, which helps to increase employment and GDP growth. Also, low interest rates decrease the cost of the government debt. Stimulative monetary policies should at least partially counterbalance upcoming restrictive fiscal policies. Having Ben Bernanke as Chairman of the Fed beyond 2013, will give the Economy a boost.
There is a high probability that the US economy may prosper and the stock market may enjoy a nice bull rally in 2013. Combining known information about the current President Barack Obama and the high probability of Ben Bernanke being reappointed in 2014 are good for economic growth. By adding unknown but possible bipartisan efforts by the US Congress to avoid the Fiscal Cliff and to increase the debt limit, the economy may have all it needs to continue its growth into the next year.
However, unknown future of the Fiscal Cliff and the debt limit increase the risk to the economy. If we only knew that democrats and republicans will work together to avoid the Fiscal Cliff and to increase the debt ceiling in a timely manner, we could have relaxed and waited for the stock market to turn bullish. The overall structure of the US Congress remains unchanged and provides difficultly to work in a bipartisan way. The US Congress is divided into two separate parties: Democrats are in charge of the Senate and Republicans are in charge of the House. As of today, the US Senate consists of 55 Democrats and 45 Republicans; 51 seats are needed for majority which Democrats have (The Huffington Post, data provided by Associated Press). House has 234 Republicans and 194 Democrats; 218 seats are needed for majority which Republicans have (The Huffington Post, data provided by Associated Press). Republican and Democrats tend to have different agendas and lack of desire to compromise.
Now let’s assume that the US Congress fails to avoid the Fiscal Cliff, the US economy will likely enter into another recession in 2013. Having tight hands, the US Congress and the President will not be able to help the economy much, and the Fed will be in charge of pursuing its dual mandate of low unemployment and price stability. Since the inflationary risk is currently low (due to subdued salaries, high unemployment, and possible further decline in oil prices), the Fed’s primary objective will remain lower unemployment. The Feb will likely continue to use stimulative monetary policies; such as, lowering both short and long-term interest rates even further from where they are today.
Surprisingly, the Fiscal Cliff combined with stimulative monetary policies and low interest rates, may improve the US government balance sheet. The government spending will decline and the cost of debt refinancing may even be lower next year than it is today. Since most of the current government debt has short-term maturity, the US Department of the Treasury will be happy to refinance its debt at a lower rate. A stronger balance sheet for the US government should strengthen the US Dollar against other currencies and increase the demand for treasuries, holding everything else constant.
The US national debt of $16.2 trillion could be decreased at the expense of the overall economy. The Fiscal Cliff is likely to push the US economy into another recession, which will cause another stock market decline. Weak and slowing economic growth in Europe and Asia, will not provide counterbalance to the recession in the US this time around, and many economies of the developed and developing world may fall into a recession.
There are two possible outcomes for the US Economy: economic prosperity or a recession in 2013. The difficulty of selecting just one possible outcome for the US economy next year lies with a divided US Congress, risk of the Fiscal Cliff, approaching US Government Debt limit, and distant but important EU with its economic and political problems. Many of these unknown risks do not directly relate on the US President. However, I hope the President can mitigate some of the risks that the US economy is facing.
Associated Press (2012, November 8). http://bigstory.ap.org/topic/mobile-election
The Huffington Post (2012, November 8). Senate Election Results 2012: Democrats Keep Control Of Upper Chamber. http://www.huffingtonpost.com/2012/11/07/senate-election-results-2012_n_2039114.html