FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 30, 2018

1. 3Q Economy Grew Faster Than Expected at 3.5% GDP

2. Voter Turnout Set to Top 50-Year Record in Midterms

3. Backlash Against Trump Spurs Interest in Midterm Election

4. I Predict a “Record Wave” Election by Both Parties

Overview

Voter turnout for the November 6 midterm elections is widely expected to be at or near a record high. Emotions are high on both sides of the political aisle for this election, and pollsters are predicting a huge turnout by Republicans, Democrats and Independents.

The implications are huge because many politicos believe the House of Representatives could be retaken by the Democrats, and some even predict that control of the Senate could be in the crosshairs. I doubt the latter but this is shaping up to be one of the most interesting midterm elections in many years.

Two months ago, it looked like the Democrats would retake majority control of the House in a so-called “Blue Wave.” They only need to pick-off 23 Republican seats to do so. As I wrote in my Blog on September 27, presidents with an approval rating below 50% lose an average of 37 seats in the House in midterm elections. The Dems were looking very good.

But then came the embarrassing fiasco of Judge Brett Kavanaugh’s Supreme Court nomination. The Democrats went way over the top in trying to defeat Judge Kavanaugh, made a spectacle of themselves on national TV and changed the whole election dynamic. Now the election hangs in the balance. The much-heralded Blue Wave no longer looks likely.

Why is this so important? If the Democrats take over control of the House (and possibly the Senate), they have made it clear that they will initiate impeachment proceedings against President Trump and try to reverse his tax cuts and deregulation efforts. If successful this would be very bad news for the economy.

I don’t know what will happen in the upcoming midterm election, but what I can tell you is that voter turnout is likely to be record high on both sides. Today, we’ll look at the implications of that and see if it leads us to any indication of the outcome. This could be a really big deal for the markets, one way or the other.

Before we get to our midterm election analysis, let’s take a look at last Friday’s better than expected initial report on 3Q Gross Domestic Product.

3Q Economy Grew Faster Than Expected at 3.5% GDP

The US economy grew above most expectations in the 3Q as inflation was kept in check and consumer spending surged, according to data released by the Commerce Department last Friday. Gross domestic product expanded by a 3.5% annual rate. Economists polled by Bloomberg expected the economy to expand by a 3.3% annual rate.

Consumer spending, which accounts for more than two-thirds of US economic activity, grew by 4.0% in the 3Q, the strongest since the 4Q of 2014. The strong rise in consumer spending helped offset an unexpected 7.9% decline in business spending. That was the biggest quarterly decline in business spending since the first quarter of 2016.

The government said the PCE Price Index, a key measure of inflation, increased by only 1.6% last quarter, much less than the 2.2% increase expected by economists polled ahead of Friday's report.

While stronger than expected, the overall expansion was at a slower pace of growth than in the previous quarter. Gross domestic product grew by 4.2% in the 2Q, marking the fastest quarterly expansion since the 3Q of 2014. The economy increased by a 2.2% annual rate in the 1Q of the year. So, for the first three quarters of 2018, the economy is growing at an average rate of 3.3%, the best since before the Great Recession.

The report comes amid growing concerns about rising interest rates slowing the economy. China and the US have slapped tariffs on billions of dollars’ worth of goods this year – increasing fears that a trade war could follow. This could slow down the global economy and eventually even the US.

Nevertheless, the latest data indicate a robust job market and lower taxes continued to propel demand, giving President Trump an opportunity to showcase his policies heading into the midterm congressional elections. At the same time, tariff-related bottlenecks and the trade war with China are headwinds for the nation’s second-longest economic expansion on record. Yet the weakness in business investment suggests the boost from corporate tax cuts may be wearing off.

Of course, that remains to be seen, and I have my doubts. Consumer confidence remains the highest in years. Ditto for small business optimism. Labor demand continues to rise in a tight market, and I don't expect that to change anytime soon. Wages are finally rising at the best clip in nearly a decade, and I believe the good economy will to continue well into next year, if not longer, barring an unexpected negative surprise. Let's enjoy this!

Unfortunately, US equities have taken a beating this month ahead of the GDP report, with the S&P 500 falling more than 8% in October through last week. Investors have become less sanguine on the outlook amid the latest run of US company earnings reports. Hopefully, this is only temporary, but the markets are likely to remain choppy for a while.

The bottom line is that last Friday's advance estimate of 3Q GDP was very positive. Keep in mind that last week's GDP estimate is the first of three for the quarter, with the other releases scheduled for late November and December when more information becomes available.

Voter Turnout Set to Top 50-Year Record in Midterms

The 2018 elections could see the highest turnout for a midterm since the mid-1960s, another time of cultural and social upheaval. "It's probably going to be a turnout rate that most people have never experienced in their lives for a midterm election," Michael McDonald, a professor at the University of Florida who studies turnout and maintains a turnout database, told NPR.

McDonald is predicting that 45-50% of eligible voters will cast a ballot. That would be a level not seen since 1970 when 47% of voters turned out or 1966 when a record 49% turned out for a midterm.

Voter turnout is much lower in midterm election years than in presidential election years, and the 2014 turnout was the lowest since 1942. Indications are that turnout this year may be much higher — more like that seen in 1966 and 1970.

In 1966, Democrats were the ones facing a backlash. President Lyndon Johnson was in the White House and Congress had just passed his Great Society measures on Medicare, voting rights and civil rights.

Democrats wound up losing 47 House seats and three Senate seats, "heralding the end of the New Deal coalition and the realignment of voters that will put Richard M. Nixon (R) in the White House in 1968," as T.A. Frail at the Smithsonian put it.

On average since World War II, only about 40% of Americans eligible to vote cast a ballot in midterms. That's 30% lower than presidential elections. In 2014, a record low 36% cast a ballot, the lowest in 70 years.

Backlash Against Trump Spurs Interest in Midterm Election

The Trump presidency has spurred a high level of interest in the 2018 midterms. Angry and frustrated Democrats, especially women, are looking to exact a measure of political revenge, as Republicans promise to stick with Trump. The 2018 midterms offer Democrats their first chance to take a stand.

McDonald said he bases his forecast on four indicators:

1. Record special election turnout

2. High primary voter turnout

3. A high degree of self-reported interest in the election

4. Record high levels of early voting

In some states, McDonald said he is seeing early voting that is exceedingly high. In Georgia, for example, compared to the midterms in 2014, early voter turnout is three times higher so far. "It just seems like all four indicators, they're all pointing in the same direction," McDonald said.

With early voting having started in numerous states in the last week or so, we are seeing record turnout across most of the country. It may be a Blue Wave or a Red Wave, we don’t know, but it will almost certainly be a Record Wave whichever way it goes.

Digging into some of those and other factors, McDonald points out that there are other signs:

A record number of candidates. More candidates than ever before filed to run in 2018. In particular, more Democrats ran for Congress in 2018 than for any single party ever before. A record number of women, particularly Democratic women, ran and were nominated as well. But Republicans overall were not that far behind.

High primary turnout. This has been particularly true among Democrats. According to a study by a Republican pollster of primary voting in 35 states, Democrats saw a 78% increase in turnout, compared to 2014, while Republicans saw a 23% uptick. Democrats were at a similar turnout level as when they took back the House in 2006 — accounting for 53% of all primary ballots cast; in 2006, they cast 54% of primary ballots.

High overall interest and engagement. A higher percentage of Democrats than at any other time in the past quarter-century told Pew they are more enthusiastic about voting than usual. Among Republicans, Pew also found signs of resilience. The level of interest by the GOP in 2018 is higher than in parties that were successfully overtaken by wave elections in the past.

In conclusion, the data are mixed so we could see a Blue Wave or a Red Wave on November 6. I’ll go out on a limb and predict a Record Wave by both parties! The question is, what will the Independents do? They will decide this election.

Whatever your political leanings, be sure to vote!!

All the best,

Gary D. Halbert

SPECIAL ARTICLES

3.5% GDP growth marks best two-quarter stretch in four years

Reasons Behind the Stock Markets’ Ugly October Fall

Uncertainties/Close Races Loom as Midterms Enter Final Stretch

Gary's Between the Lines Blog: Trump Deregulation Saved Taxpayers $56 Billion, More Coming

 

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