The Midterms May Hinge on One Thing: How the Economy Feels

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2:10I'm Stephanie Flanders, Head of Government and Economics at Bloomberg. This is Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaking up the global economy, and what on earth is going to happen next. This week, we're taking a first look at how the US economy could affect the midterm elections coming up in November in the US. Elections that, of course, the Democrats are hoping will favour the out-of-power party, them, even more than usual, potentially giving them control of one house, even conceivably both houses of Congress. When you look at the world economy, there's a sort of feeling that it's been remarkably resilient in the face of continued inflation, Donald Trump's tariffs, war in Ukraine, the Iran war most recently, and related to all that, some pretty big energy shocks.

3:04We still see stock markets going up, and we have now in the last few weeks seen oil prices come down quite sharply, despite the Iran agreement seeming to be quite tenuous. But how much damage has already been done, and how can the Republicans make voters feel more positive about the economy? Because when you look at the polling, they seem to be pretty down on it at the moment. We're going to get into all of that with our usual kind of two sides of the street here at Bloomberg. We have Nancy Cook, Senior National Political Correspondent in Washington. Nancy, thanks very much for joining. It's been a while, actually.

3:41Yeah, thanks for having me, Stephanie. I'm delighted to be here. And Stu Paul, based in New York, who covers the US and Canadian economies for Bloomberg Economics. Stu, nice to have you. Thank you for having me, Stephanie.

3:58So, Nancy, you're sitting in DC. You're writing often about how Republicans are thinking about the midterms, some of the sort of ways in which they're hoping to rebuild Republican support. Is the economy the main thing they're worried about at this point? Well, I think that Republicans take a very overconfident stance when you talk to them publicly or when they talk about things. But privately, they are pretty worried about the state of the economy. It's not that the actual economy is poor. In the U.S., for instance, the labor market remains really healthy. Unemployment is hovering around 4%. And so there are like a lot of really bright spots in the economy.

4:42However, American voters are in a bad mood about the economy. And that has just been persistent. I have done some traveling this spring to very red districts in Texas. I went to Kentucky in May. And people are just not happy. And these are people who are really core to the Trump base. And they feel like the cost of living is too high. I've talked to a late 20-something couple in Kentucky. They want to buy a house. They want to have children. They're worried about the cost of child care. So these voters are just in a bad mood. And no matter what the Trump people say, they're having a hard time overcoming that.

5:18And so they privately are very freaked out about this. And I was at a conference on Friday last week of evangelical voters who are some of the most hardcore supporters of the Republican Party, and they're not in a good mood. So that, to me, is just a real warning sign. And I think that there's a few things at play. One, people are not happy about gas prices. People are not happy that the war in Iran seems to be going on. And then a lot of people are just really mad about the cost of living. They feel groceries are still high. They just feel like everything costs more. And they held President Biden responsible for that.

5:54But now the economy squarely belongs to Trump and they are holding him responsible. And I remember he has said in the past when they say, which bits of the economy are you responsible for? And he says very clearly, well, the good bits and the bad bits are all Biden. He's very upfront about it. Stu, so let's get into this a bit about what the damage might be and the particular groups that might be affected. Because part of this is gas prices have always been a concern for all presidents, but there was a specific aspect to the Trump coalition that really was quite new. And then that affects maybe the voter blocks that we're looking at when we think about the impact of things like inflation and rising gas prices.

6:34Remind us what was different about his coalition. The Trump coalition that really formed before the 2024 election was one in which the Republicans gained even more of an advantage among men, particularly young men. And the Trump coalition included a larger share of Hispanic and Black voters in 2024. So we wanted to dig into the data to see a little bit how each of those voting blocks have been faring since President Trump took office. Of course, it's easiest to start with men and to think about employment for men versus women, for example. And if you look at the industries that are dominated by men, things like construction or manufacturing or transportation and warehousing, all of those industries overall basically lost jobs.

7:31The industries that have been gaining jobs are those that are primarily dominated by women, education and health care in particular. And so the durability of Trump's coalition starts to come into question when you look at the data with a little bit of a finer tooth comb, where he might still have a little bit of an advantage or where the data have swung somewhat in his favor, is that the unemployment rate for black men and Hispanic men has fallen just slightly by about half a percentage point and a quarter percentage point, respectively, since President Trump took office. That's probably not quite enough.

8:14That's just one dimension of analysis for thinking about maintaining a pretty significant voting block. But that is one data point, at least, that he could point to to try to get voters to show up for the polls. Nancy brought up a really important point about affordability. And, of course, gasoline prices, food prices, shelter prices are front of mind for everybody. And I'm here in New York where the election of Mayor Mamdani, that entire campaign was entirely focused around that key word of affordability. And so we looked at the U.S. voting population by income decile. and it's those lowest income households that are experiencing the highest inflation.

9:03We estimate that cumulative inflation over Trump's most recent term in office for those in the lowest income decile is about 4.8 percent. For those in the highest income decile, the richest households, cumulative inflation is just about 3.8 percent, a full percentage point lower for the richest among us. What's interesting though, Stephanie, is that gasoline prices seem to be hitting those middle-class households and upper-middle-class households relatively more even than those at the lowest end of the income distribution. These are suburban folks. These are two-car households. These are SUV households that need to fill up and bring the kids to school, commute into the office.

9:46And so even those households that seem to be faring slightly better than the worst among us, those who are faring even slightly better, are feeling the effects of higher energy prices. And you reminded us in that piece, this is a relatively new phenomenon, but that Trump had got 70 % among voters earning between$30 ,000 and$100 ,000 a year. So those kind of classic working class group. And you're right to point out that the inflation rate affects them differently. I guess one more thing for you, Stuart, because I know there's some related work we did a little bit more on the geography of some of these sort of key races in the Senate.

10:28There's only there's a sort of just over half a dozen, I think, Senate seats that are in play if the Democrats are going to have a chance of retaking control, which I think is probably a tough ask. And there are some pretty wide differences across states in how much gas prices have gone up. It seems that sometimes I hear people talking in California seem to have really had a massive increase, but they're less in the frame for the Senate. But just on that, Stu, how is the difference in gas prices potentially affecting some of those races? So on a dollar basis, there's a little bit less dispersion in gasoline price increases across states.

11:08Among those states that have contested Senate seats, Georgia and North Carolina have had a relatively small increase in gasoline prices since the onset of the war in Iran. Ohio, Michigan have had a relatively larger increase in gasoline prices. When we talk about states like California, of course, state-level gasoline taxes matter a lot. And I imagine that those voters might be blaming their state and local governments more so than the president. And as you say, California isn't so much in play. But you're right to look at the geographic differences for things like gasoline prices. If we look at something like unemployment also, there's pretty stark differences across those key battleground states.

11:51So, for example, Alaska and Georgia have seen a relative increase in the unemployment rate since President Trump took office. Of course, pretty important contested Senate seats in those states. Maine, North Carolina, Michigan have actually seen a decrease in their unemployment rate. All eyes on Maine right now with Plattner and Susan Collins, but the data are faring relatively well for Susan Collins at this point. I guess we should say, Nancy, obviously, we're just focusing on the economics here, but there's plenty of other things. As people are always saying, you mustn't make assumptions about how all Hispanic people voting, for example, whether or not their unemployment rate has gone up may be less important than how they're feeling about ICE.

12:31But still on the economics, you highlighted, Nancy, this seemed a bit similar from some of the debates we had in the Biden era, that the numbers didn't look that bad. But as you say, there's just a lot of grumpy people around who don't really care that inflation is lower because everything still costs a lot more than it did a few years ago. Just the fact that the price is not rising anymore doesn't mean they're not fed up every time they go to the grocery store. And the dynamic was that President Biden kept telling them they were wrong to be down on the economy and the economy was really doing very well.

13:04That didn't work out so well. There has been this tension, and you've talked about it before, about the president seeming to do the same thing, seeming to just not want to recognise that anyone is feeling anything negative about the economy, even though his advisers might be suggesting that he feel voters' pain a bit more. Has that tension got any better? Has his advisors had any success on that? I feel like there was supposed to be a whole affordability tour that didn't really happen. Are we seeing that reprieved maybe in the fall? Interestingly, I feel like President Trump is going even further than President Biden did in dismissing Americans' concerns.

13:45I mean, Biden tried to actively convince Americans that what they were feeling was not true. But Trump is just actively saying that he, you know, he has called affordability a Democratic hoax. They say, oh, he doesn't realize prices are coming down very substantially. But they have a new word. You know, they always have a hoax. The new word is affordability. Last week, he refused to sign a bipartisan housing bill that both Republicans and Democrats on Capitol Hill were very excited about because it would have given money to create new housing supply, which is a big problem in the U.S. He called that a, quote, big yawn compared to this voter ID legislation he wants.

14:26Here's what I would like to sign. Much more than a bill that big deal. It's a yawn. Some people say it's wonderful. To me, compared to the Save America Act, just about everything is a big yawn. And so it's not like that he's trying to convince voters of something. He just is not taking it seriously. And that's like a whole new level to the problem. What has been interesting to me is that Republicans have really shifted their strategy in the last month. And so they know that the historical headwinds for them to lose congressional seats, that is very much in play this time. And Trump is really not playing ball with them on campaigning on the economy or trying to stand up Republicans for House and Senate races.

15:11So what they're trying to do instead is they're trying to call out the Democrats. And so you've seen a lot of top Trump advisors go on TV or say, hey, look, the Democrats are crazy now. They're too liberal. And they're trying to make Mayor Mondami in New York the poster child for all of the Democratic Party and basically scare voters into continuing to support Republicans, even though voters may not be super happy about the economy. And that has been a shift we've seen in the last six months. They're trying to make it not a referendum on Trump, but just a referendum on the two parties in general.

15:45And as far as there's quite left-wing candidates in some of the Democrat races, they're going to get an enormous amount of publicity, I suspect.

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18:17Stuart, we've been sort of backward looking. How have these particular parts of the electorate been affected by what's happened so far under the second Trump administration? But obviously, we're also in the business of forecasting. and we have seen the oil price fall pretty sharply, which if sustained could feed into pump prices in the US fairly quickly, presumably also have a softening effect on inflation. Right now, is it looking like it is going to be a slightly better environment just from those basic headline numbers on inflation? I think so. It's particularly difficult to forecast in the most granular level.

18:58So for example, the level of the congressional district, but if we look at a more zoomed out level and we think about a lot of the factors that send voters to the polls, things like living standards and as you say, inflation, it actually looks as though it's the case that softening inflation throughout the rest of the year paired with solid economic growth fueled by a lot of investment and solid hiring plans will be enough to keep it a little bit closer than betting markets are currently thinking that the midterms are going to be. So, for example, if you just use a strictly top-down model that forecasts the share that Republicans will retain in the House of Representatives, for example, based on these high-level economic statistics, and you plug in some of our forecasts for inflation, GDP growth, and so on, it looks like there are just about five House seats flipping from Republican to Democratic control.

19:58Now, again, with betting markets assigning really high probabilities of the Senate flipping or the House flipping, the top-down statistics, the aggregate economic activity and data that are nationwide make it look like it's a bit more of a contested set of midterm elections than the betting markets are currently supposing. And we haven't talked about interest rates. And obviously, the vast majority of mortgages are on long-term fixed rate mortgages. So they're not affected day to day by what happens at the Fed. But the president has put a pretty big emphasis on getting interest rates down. And it doesn't seem to be much evidence that his new head of the central bank, Kevin Walsh, is itching to lower rates.

20:45If anything, he sounded a bit more hawkish on inflation. So just on that, remind me, is Donald Trump going to get any rate cuts between now and the midterms? It's interesting. I've talked with a lot of Trump advisors who have spent months actually laying the groundwork to try to make sure that Kevin Walsh, the new head of the Federal Reserve has an easier time than Jay Powell. And so no one thinks that the interest rates are going to drop before the November midterms. And a lot of people have spent time trying to explain to Donald Trump why that's okay. And let's give Kevin Warsh some runway. And this is going to be your guy, because they really don't want him to turn against Warsh.

21:23But that is another piece of the economic puzzle that's making voters feel bad, really the gas prices, the interest rates, and then people just being mad about the war in Iran. And I would pinpoint those three things as when I talk to Republican voters, the things that people are most concerned about. Stu, where are you seeing rates? As much as we know Donald Trump to be a low interest rate guy, I'm glad to hear from Nancy that a lot of his staff is setting him up to be a little bit disappointed. I do not think that we are going to get any interest rate cuts from the Fed through year-end, I expect also to get a significant amount of jawboning from our central bankers that's more hawkish in nature to try to anchor inflation expectations and to try to buy quite a little bit of time and credibility on the inflation price stability front.

22:14And so it is good to hear from Nancy that folks in the White House and the Treasury have been clearing a path to allow Kevin Warsh to maintain policy rates where they are and to try to assert his independence and to try to retain some price stability and inflation credibility, which hopefully could lead to a little bit of softening of long-term interest rates over which they only have loose control. Which of course would also then help anyone who's getting a new mortgage or remortgaging. Nancy, I'll give you the sort of last word. As I said at the start, I don't think this will be the first conversation we have on this topic.

22:51But, you know, we have the summer, Congress is now out, we have the summer, we have, there's going to be sort of mad July 4th celebrations. I was just hearing from colleagues how hard it is to get around DC at the moment with all the Ferris wheels and the construction works and everything else. But we have that, assuming that you end up, that you're still in a sort of uneasy stalemate when it comes to the Iran situation, where no one feels particularly good about it, but oil prices stay reasonably low. How are Democrats going to play this in the summer? Are they just going to keep on banging the drum for everything that's happened so far?

23:29And they're convinced that the bad news is going to stick, even if the headlines get a bit better? Or is there an opening for Republicans to make this a bit better? I think that there's an opening for Republicans to make this better than people are anticipating, just because the Democratic Party continues to be in such disarray since the 2024 election. There's just an extraordinary amount of infighting in the Democratic Party right now. There's no clear leader of it, not that there would be at this point, but there's major disagreements over policy, particularly over things like support of Israel, how far people should go on the cost of living agenda.

24:08And what we're seeing is there in primaries, particularly in Colorado, for instance, there are people who are part of the Democratic Socialist Party. This is the party Mayor Mondami is part of in New York that are winning primaries. And there's these major upsets in these Democratic primaries. And what that does is it, A, makes centrist Democratic voters really uncomfortable, but B, it furthers this notion that Republicans are trying to advance that Democrats are super, super liberal. And so there's just huge infighting between the progressive wing of the Democratic Party and the more moderate wing.

24:41And I think that is going to potentially hurt them in the midterms because the more left-leaning candidates who end up running for House and Senate races, it's just going to potentially alienate swing voters who are really up for grabs. Some of what Stuart was talking about with these young men and Black men and Hispanics, those are voters that were part of the Trump coalition in 2024, but they were, you know, I think, sort of borrowing them. They're not solidly Republican. And so in order for Democrats to appeal to a wider coalition, they need policies that are a little bit more centrist or moderate.

25:17And I think that Democrats just continue to tear each other apart. Just as a final thing, for those of us who thought once every four years was really enough for conventions, you're going to have the delight of a midterm convention. Is that right? That's right. This is President Trump's idea. The Republican National Committee had to change their bylaws in January to accommodate this new idea. And really, normally conventions are a place where the party nominates the candidate who's actually going to run for president. Trump really wants a made-for-TV showmanship party that he can put on TV before the fall when voters really make up their minds who they're going to vote for.

25:58And so it's going to be two days in Dallas, Texas, September 9th and 10th. And it's really, there's not going to be party business that's conducted. No one's going to sign off on a party platform. No one's going to nominate a candidate. It's really just something to try to juice Republican voters to go to the polls. What's the difference between that and all the other Trump sort of rallies that he does? It's going to be like a two-day rally in Texas. And Texas has a huge number of Republican donors, huge oil and gas industry. This is a new thing, this midterm convention, and we'll see how it goes.