US special: The Harris bounce

It has long been clear to us that Biden was not going to beat Trump, so in February we were the first bank to assume a Trump victory in our economic forecasts. Economic data were not likely to get better from that point and Biden was still trailing Trump both in the national polls and in the swing states since October 2023. This was as good as it was going to get for Biden. And that was not good enough, certainly not for a majority in the Electoral College. Ironically, this was such a good forecast, that the Democrats decided to push Biden off the ticket. While voters overwhelmingly indicated they thought Biden was too old for a second term, it took a disturbing performance during the June 27 debate for the Democratic elite to realize this. While his staff and the Democratic elite had been trying to keep this from the public, the debate on CNN revealed to the public just how much Biden had deteriorated. On July 21, Biden finally succumbed to the pressure from his party, financial donors, and Hollywood celebrities to withdraw from the November election, and endorsed his Vice President, Kamala Harris. With limited time until the Democratic National Convention on August 19 to 22, her potential rivals endorsed her as well, paving the way for her nomination.

With Kamala Harris on top of the Democratic ticket, the odds for the Democrats in the presidential election have dramatically improved. After Biden’s debate on June 27, a Trump victory looked sure and a Red Wave even likely. This would mean not only a universal tariff, but also tax cuts and deregulation. The attempted assassination of Trump on July 13 seemed to solidify Trump’s position. However, when Biden withdrew from the presidential race on July 21, everything changed. Harris began to rise in the polls, the probability of a Red Wave fell back, and even Trump’s victory started to look unsure.

Biden’s replacement by Harris has shaken up the presidential election race. In a system where voting is not mandatory, voter enthusiasm is as important as voter preferences. It looks like Harris is firing up the base, which may increase the number of Democratic voters that will actually make the effort to vote. What’s more, the demographics of the presidential election are changing. Harris has a stronger appeal to female, young, black, and Hispanic voters, but could lose white, male, and older voters. By balancing the ticket with Tim Walz, however, she has likely offset this to a certain extent.

After weeks of media hype and her nomination at the Democratic National Convention, her popularity is still riding high on the “Harris bounce.” This could mean that this is as good as it gets for her. Although the Republican campaign is struggling to adapt to the new Democratic candidate, some of Harris’ economic plans may be too left-wing for swing voters and come up short under closer scrutiny. The deteriorating economic data may also reflect negatively on her, and she remains vulnerable on border security.

For these reasons, we think it is too early to change our baseline scenario to a Harris victory. Currently, there is a lot of enthusiasm among the media and celebrities, giving Harris a boost in the opinion polls. However, as we noted in our Monthly Outlook of August 1, it remains to be seen whether this can be sustained when/if the honeymoon period in the mainstream media comes to an end.

The Republican campaign has trouble adapting and focusing, but what if it gets back on track? An effective campaign could stress Harris’ involvement in Biden’s policies, which did not get much approval. As the Vice President, she often had the tie-breaking vote in the Senate, so distancing herself from Biden’s policies is not credible. And if she now claims to be an inflation fighter, where has she been in the last 3½ years? Empirical evidence shows that excessive government spending pushed up inflation higher than necessary in the United States. Voters still trust Trump more on the economy than Biden or Harris. For example, in a Wall Street Journal poll taken on August 24-28, Trump had an 8 point advantage over Harris on handling the economy and a 5 point lead on handling inflation. However, late last year Trump’s lead over Biden was about 20 points on both issues.

What’s more, she was charged with handling the border and that turned into a fiasco. Of course, there is some nuance about what part of the border issue she was tasked with (“the root causes of”), but this nuance is not likely to increase voter confidence in her ability to deal with the border problem. As Republicans are developing their narrative of Harris, they could also blame her for her role in shielding Biden from the media and the public, obscuring the deterioration of his physical and mental condition. What’s more, Biden has depicted Trump as a threat to democracy, but Biden’s withdrawal from the top of the Democratic presidential ticket in favor of Harris can hardly be called a shining example of democracy at work. After 87% of 16 million voters in the Democratic primaries chose Biden, the party elite and the party’s financial donors forced him off the ticket. Of course, it could be argued that voters were likely to reconsider their preference after the June 27 debate, but this is because that same party elite kept Biden’s deteriorating condition a secret from the voters.

Meanwhile, labor market data is likely to continue to deteriorate, as we discussed in the Jackson Hole Comment in our Outlook of last month. Since this would take place under the Biden-Harris administration, she is likely to get some of the blame for that. In addition to sharing the blame for the unpopular policies of the Biden-Harris administration, Harris’ own agenda is even more left-wing than Biden’s. The more attention is being paid to this, the more swing voters she may lose. It remains to be seen how voters are going to react when they hear more details about Harris’ economic plans. Some of her early plans on price gouging – although popular among grassroots Democrats – have already received a lot of pushback, even from economists in the Democratic Party. Trump has described her plans as “communist price control.”

Finally, we should keep in mind that a Democratic presidential candidate needs a significant majority in the national popular poll to get a majority in the Electoral College. Though the media publish poll after poll showing that Harris is in the lead, most of them should be taken with a grain of salt, and not just because of their methodological deficiencies, which often lead to a bias in favor of the Democratic candidate. In the US, winning the national popular vote does not guarantee the presidency. The latter is determined by the Electoral College, where Republicans have an advantage because smaller states are overrepresented. Therefore, the Democratic candidate needs to win key swing states, which amounts to getting a sufficiently large majority in the national polls. A simple majority is not enough. For example, in 2016, Hillary Clinton won the popular vote by two percentage points (48.2% versus 46.1%), but Donald Trump won the electoral vote by 304 against 227. Note that the RCP poll average for Harris is now 48.0% versus 46.2% for Trump. Even now that Harris is scoring higher in the polls than ever before, getting a majority in the Electoral College remains an uphill battle for the Democrats. So what happens if the Harris bounce is slowing down?

In the coming weeks, the Republicans will try to sell their narrative on Harris and then it remains to be seen whether she can hold on to the recent rise in the polls. Therefore, for now, we stick to our assumption that Trump is the next President of the United States, until the polls show that Harris can maintain a lead in the swing states that would give her a majority in the Electoral College. While the Democrats have improved their prospects for the November elections by pushing Biden off the presidential ticket, the Electoral College could still remain elusive.

In Harris’ first television interview (CNN, August 29), together with running mate Tim Walz, the questions were only mildly critical and she was not pressed on her flipflopping on issues (fracking), no details were asked about her economic policies, and certainly no questions were asked about her role in shielding Biden’s deteriorating condition from the press and the public. However, she did embrace Biden’s policies, which will make her vulnerable to more critical journalists.

There are several vulnerabilities that could make an end to the Harris bounce. Alternatively, if the Republican campaign fails to get its act together, time may be running out for them to hit at Harris’ vulnerabilities. In this case, she could ride the Harris bounce all the way to Election Day . Meanwhile, Trump has his own vulnerabilities, besides his difficulty to stay on message. Harris is likely to make abortion a key theme of her campaign, something that Biden did not. This could put Trump in a difficult position. He has a difficult balancing act to perform. He does not want to alienate swing voters by taking an extreme anti-abortion stance, but his conservative base wants him to go all the way. Trump’s solution has been to leave anti-abortion legislation to the states. However, the Democrats continue to claim that President Trump would sign a national ban on abortion. What’s more, with J.D. Vance as his running mate, Trump’s ticket is not well-balanced. Usually, a presidential candidate picks a vice-presidential candidate who can broaden the appeal of the ticket. For example, Trump could have chosen a more moderate Republican. Had he known about Biden’s withdrawal in advance, he might have picked another running mate. Consequently, while we still have a Trump victory as our baseline, the probability of a Democratic victory has increased substantially.

How would a Democratic victory affect our economic forecasts? Note that we have expressed a Trump victory through the introduction of a universal tariff in 2025. He does not need a majority in Congress for this, in contrast to tax cuts. Therefore, it is a more robust forecast. A universal tariff is likely to lead to inflation and retaliation by trading partners that would slow down GDP and employment growth.

Although the Democrats have also become increasingly protectionist, they have been more friendly toward their allies in Europe, Asia and the Americas. Therefore, a universal tariff is out of the question. That does not mean that there will be no protectionist measures. For example, Biden’s Inflation Reduction Act has shown that the Democrats are not afraid to go that way. However, they are likely to continue to focus their protectionist efforts on China, which they regard as their main competitor. In fact, they would likely step up their efforts to get their allies on board with their anti-China policies. Therefore, a Harris presidency would remove the risk of a universal tariff, but a trade confrontation with China remains in the cards. In comparison with a Trump presidency, this would reduce the upward impact on US inflation and the negative impact on GDP and employment growth, but certainly not entirely. Protectionism will remain on the agenda.

In the table below, we qualitatively compare both candidates on an overall level.

For the Fed, a Kamala Harris presidency would cause less inflation in 2025 and 2026, and therefore the cutting cycle could continue well beyond January. Therefore, we would expect more rate cuts in 2025 and 2026, instead of the Fed pausing its cutting cycle during the course of 2025 under a Trump presidency. However, the number of additional rate cuts may be limited as some of Harris’ economic plans could be inflationary as well. For example, her plan to give USD 25,000 to first-time home buyers would likely lead to a rebound in housing inflation. Overall, high government spending has been inflationary as well. So a Harris administration is not likely to lead to very low policy rates, unless her policies cause a severe recession. Nevertheless, Harris would mean more rate cuts, unless the Trump administration implements its far-reaching plans for the Fed that we described in Trump and allies plan to overhaul the Fed. In this case, we would see low policy rates, rampant inflation and consequently a steep yield curve.

Making an assumption about the presidential election outcome has been crucial this year, because the policies of Trump and Biden-Harris have very different implications, particularly for inflation and the Fed. Economic forecasters usually pretend there are no elections, but we find this is not very helpful in informing our clients. The very least we can do as forecasters, is to provide a sketch of the different scenarios and explain which we think is most likely to materialize. If forecasting boils down to simply extrapolating current trends, then it is not of much use in a world with regime change.

For now, because of all the downside risk to Harris’ popularity, and the uphill battle for Democrats in the Electoral College, we still have a Trump victory as our baseline assumption in making economic forecasts. However, the probability of a Democratic victory has increased substantially.