What does a blue Congress mean for the US economy and investors?

The Democrats’ victory in both the Senate and the House of Representatives will have implications on several fronts. We asked Maarten Lafeber, macroeconomist and senior strategist at APG, what the outcome means for the US economy and investors. “Donald Trump’s economic agenda has been constrained, not dismantled.”

Does “It’s the economy, stupid” apply to this election result as well?
“Inflation certainly played an important role. The headline inflation rate stands at 3.7 percent, but that doesn’t tell the whole story. Gasoline prices at the pump, for example, have risen by around 50 percent since January 1. Americans feel that directly in their wallets. That inflation is partly the result of trade tariffs and the war in Iran. I think that is an important explanation for the scale of the blue wave.

But something else stands out about these elections. It is positive that they took place without major problems. The result is also so clear that it is difficult to call its credibility into question. President Donald Trump has conceded defeat and said that he wants to work with Congress. That means US institutions have passed an important test. For the past two years, the presidency, the Senate and the House of Representatives were all in Republican hands. We are now back to divided government, which has partly restored the system of checks and balances.”

What does a blue Congress mean for the US economy?
“Above all, it means that Trump will have a much harder time implementing his domestic economic agenda. Think of further tax cuts, major spending packages and new legislation. He needs Congress for those. Appointments of senior government officials and judges could also face greater resistance in the Senate.

It will probably also mean less fiscal stimulus. Over the past two years, Trump has cut taxes and increased government spending. That has given the economy a strong boost, but it has also pushed the budget deficit even higher. We shouldn’t assume, however, that less fiscal stimulus means the deficit will quickly disappear. The gap is simply too large for that.

Less stimulus could weigh somewhat on economic growth in the short term, but it would also reduce upward pressure on inflation and long-term interest rates. We saw that immediately in the bond market: when it became clear that the Democrats would win both the Senate and the House, the US 10-year Treasury yield fell.”

Does that make the outcome favorable for investors?
“In the short term, it could actually create some uncertainty. One question, for example, is how much scrutiny a Democratic Congress will apply to technology and AI companies. I expect more congressional hearings and investigations, and more attention to privacy and safety, as well as the electricity and water use of data centers and the strain they place on the power grid. That could have implications for certain companies. We also saw an initial reaction in other sectors. Green energy stocks rose, while defense stocks fell. So the market appears to be taking into account that the political shift could have consequences for these sectors as well.

At the same time, the return of stronger checks on political power is positive in the longer term. Both an economy and a democracy benefit from a well-functioning system of checks and balances. That helps strengthen confidence in institutions and, ultimately, makes a country more attractive to investors. So we need to distinguish between the short and the long term. In the short term, the search for a new political balance may create uncertainty. In the longer term, the restoration of institutional checks and balances is a positive development.”

Does this mean that Trump’s economic agenda is now largely off the table?
“No. His economic agenda has been constrained, not dismantled. Domestically, he will have much more difficulty getting new measures through Congress. But the White House retains considerable power in other areas, including trade, import tariffs, sanctions and foreign policy more broadly. So trade tensions will not suddenly disappear just because Congress has turned blue.

That is also important for Europe. US import tariffs will not automatically disappear, and risks surrounding Iran and Ukraine remain. A further escalation involving Iran, for example, could hit Europe relatively hard through higher energy prices, as Europe still depends heavily on imports for its energy supply. So in Europe we shouldn’t assume that we have suddenly returned to the pre-Trump era. The direction of US policy is changing in some areas, but many of the uncertainties of recent years remain.”