RaboResearch - Economic Research

Trump’s midterm exam

Economic Report

  • The midterm elections on November 6 will be crucial for President Trump’s ability to govern in the next two years, especially on domestic issues. Consequently, President Trump’s actions in the near-term should be seen from a domestic perspective – more than usual – as he tries to preserve his ability to make domestic policy without compromising with the Democratic opposition.
  • However, foreign policy and trade policy remain the prerogative of the President, so he could still continue his confrontational international course even if the Republicans lose the House or the Senate.
  • Meanwhile, as long as the Trump voters remain loyal to the President, the Republicans are likely to continue to successfully defend their president against Democratic attempts at impeachment & conviction because the 2/3 majority in the Senate that the Democrats will need to remove the President from office seems unlikely.

After eighteen months in office, President Trump has made his mark. Initially, we saw a flurry of executive orders and presidential memoranda. However, before the end of 2017 Trump had his first major legislative victory when he signed the Tax Cuts and Jobs Act. This year he has started shaking up the status quo on international trade. In the near-term President Trump’s actions will be increasingly guided by the mid-term elections that will take place on November 6. Although he is not on the ballot himself, the elections can be seen as Trump’s midterm exam, and the result for the Republicans will also determine his ability to govern in the next two years. Note that both President Clinton and President Obama lost their Democratic majority in the House of Representatives after two years in office and were forced to compromise with the Republicans.

An economy that can take a hit

Figure 1: Solid GDP growth
Figure 1: Solid GDP growthSource: Macrobond

Last week, the release of the GDP figures for Q2 revealed that the economy grew by 4.1% (quarter-on-quarter, at an annualized rate). President Trump gave a press conference an hour later explaining that this was an amazing rate, very very sustainable, and due to his economic policies. While net exports and inventories may have been distorted by the front-running of tariffs, strong consumption and business investment suggest that the underlying domestic momentum is indeed solid, although the sustainable growth rate is likely to be well below 4%. Ironically, strong momentum also means that the US is in a good starting position to engage in trade conflicts. The trade measures taken by the US so far and the retaliation by foreign governments are likely to slow down the economy only marginally. However, that could change in case of a global trade war in which a range of foreign countries takes protectionist measures aimed at the US, which is after all the party that is trying to change the status quo. However, this is a scenario that most countries would like to avoid because of the pain that will be inflicted on all involved in the global trade war. Therefore, the trade war is basically a game of chicken. In The Trump Trade War Game we argued that the perceived irrationality of President Trump by trading partners would increase his chances of winning this game. In other words, in a sense it would be rational for Trump to be seen as irrational. The conciliatory approach taken by EC President Juncker last week suggests that Trump’s strategy is working so far. The main risk is that his hardball approach to trade policy backfires in the end and undoes the benefits from tax cuts and deregulation. The game has only just started, and he is taking on a range of trading partners at the same time.

Sticky collusion

Meanwhile, President Trump is still haunted by accusations of collusion with the Russians in the 2016 presidential elections. Special Counsel Mueller is making progress, albeit too slowly for many Republicans who want the topic to disappear. As we argued in Trumpgate as long as the Republicans stand by their president, neither impeachment & conviction nor the 25th Amendment are likely outcomes. Even if the Republicans lose their majority in the Senate, it will be difficult for the Democrats to reach the 2/3 majority needed to remove the President. The Republicans in Congress need the Trump voters for re-election in the midterms in November 2018 and the elections in November 2020. As long as the Trump voters stand by President Trump, he is likely to keep the support of the Republicans in Congress.

Table 1: Two routes for removal of the President
Table 1: Two routes for removal of the PresidentSource: Rabobank

Countdown to the midterms…

Figure 2: Trump’s approval rating has stabilized
Figure 2: Trump’s approval rating has stabilizedSource: Macrobond

On November 6 the midterm elections for the House of Representatives and 1/3 of the Senate take place. At present, the Republicans have 236 of the 435 seats in the House and 51 of the 100 seats in the Senate. Indirectly, this is also a midterm exam for President Trump. Note that President Trump’s approval rating took a dive after he fired Comey, but since he signed the Tax Cuts and Jobs Act his popularity has rebounded and stabilized. In the midterm elections, the Republicans hope to benefit from the tax cuts, deregulation and the strong economy. An important question is how the voters in the different states and districts will react to the various trade conflicts. This will depend on the industrial composition of the state or district (for example: steel-producing industry vs steel-consuming industry), the type of agriculture (targeted by retaliatory measures?), and the compensation that the government promises to offer victims of retaliation by foreign governments.

… shutdown before the midterms?

Before the midterm elections fiscal year 2019 starts, on October 1, which requires Congress to adopt a spending bill to give the federal government the authority to keep on spending money. President Trump has threatened to shut down the government, which he could do by refusing to sign the spending bill that Congress sends to him, if it does not include funding for the border wall. However, the Republicans in Congress have urged President Trump to avoid a government shutdown before the midterms in November. Since the Republicans have majorities both in the Senate and the House, the voters are likely to blame them for the government shutdown. While a shutdown would have only a modest adverse impact on Q4 GDP growth, it would generate a lot of negative media coverage for the Republicans before the midterm elections.


A Democratic victory in the midterm elections will not lead to a removal of President Trump from office as long as the Republicans continue to rally around their President. It may also have only a limited impact on Trump's foreign and trade policies as in the US many powers have been delegated by Congress to the President. However, President Trump will be forced to work with the Democrats on domestic policies if the Republicans lose either the House or the Senate. In order to keep control, the Republicans will urge President Trump to keep the midterms in mind in the coming months.

Philip Marey
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 71 21437

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