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Economics

Three reasons why Donald Trump might outperform the polls

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THIS IS AMERICA’S closest presidential contest since at least 2000. With hours to go before the polls close, forecasting models, including The Economist’s, are showing a nearly 50/50 race, because swing-state polls are roughly tied. Thanks to one last batch on the campaign’s final day, our model favours Kamala Harris over Donald Trump by a very narrow margin, giving her a 56% chance of victory. Others show an even tighter race: Split Ticket puts Ms Harris on 53%, and both FiveThirtyEight and Silver Bulletin have her at 50%.

In states where our model gives the leader at least a 90% chance to win, Ms Harris has 226 electoral votes to Mr Trump’s 219. In the remaining seven states, the two are within three percentage points of each other in all state polling averages. Ms Harris is clinging to one-point leads in Michigan and Wisconsin; Mr Trump has similarly small edges in North Carolina and Georgia, and a slightly larger one in Arizona. Nevada and Pennsylvania are a dead heat.

The vice-president’s easiest path to victory is winning the Rust Belt states of Michigan, Pennsylvania and Wisconsin—just as the former president’s task is to break through this northern “blue wall”, as he did in 2016. If Ms Harris loses even one of these states, she would have to pick off a Sun Belt state where Mr Trump is currently in the lead.

And yet the race will probably not wind up as close as polls suggest. Since 1976, state polling averages have missed the final margin between the two nominees by an average of four percentage points. Moreover, when surveys underestimate a candidate in one part of the country, they generally err in the same way in other parts, too. At least a modest nationwide error is likely. Such an error, given how close the polls are, would probably deliver most or all of the swing states, and a decisive electoral-college victory, to whichever candidate benefits.

The chances of a big error may be even larger than usual this year because of evidence that at least some pollsters have been “herding”. This means that, when they get an outlier result, they decline to publish it or adjust their weighting to bring it closer to consensus. To be sure, America’s two most revered pollsters have released some stunning results this year. The New York Times and Siena College put Mr Trump up 13 points in Florida. On November 2nd, Ann Selzer gave Ms Harris a three-point lead in Iowa, which Mr Trump won by eight points in 2020. But the share of polls that put the candidates within a point of each other in the swing states is greater than random chance alone can explain.

Betting markets suggest that Mr Trump is likelier to outperform than is Ms Harris. On real-money exchanges with unlimited stakes, he is currently a 56-62% favourite. Some Democratic pundits dismiss this as “manipulation” by Trump supporters. Such charges are hard to stand up. Mr Trump is favoured on all major markets. Unless Elon Musk himself is propping him up on most of these sites, the prices simply reflect the (dollar-weighted) wisdom of crowds.

Three Trump cards

More convincing reasons can explain the divergence between models and markets. The first is that forecasts that rely mainly on state polling averages, rather than national ones, may be underestimating the “stickiness” of Mr Trump’s advantage in the electoral college. In 2016 and 2020, Democrats fared far better in the national popular vote than in Wisconsin, the state that delivered the decisive 270th vote in both elections. Currently Ms Harris clings to a tiny one-point edge in national polls.

Most of Mr Trump’s gains since 2020 have come from non-white and Hispanic voters, who are concentrated in big, uncompetitive states. State-level surveys support the idea that Republicans will “waste” many more votes this year: Mr Trump has inefficiently narrowed his deficit in New York and expanded his leads in Florida and Texas. None of that will decide the election. But if Ms Harris really does prevail by a single point in the popular vote, Mr Trump would need to retain only a fraction of his four-point electoral-college advantage of 2020 to return to the White House.

The second argument in Mr Trump’s favour lies in early-voting data. In 2020 Mr Trump denounced early and postal voting, allowing Democrats to bank huge leads before election day. This year he has sent mixed messages. As a result, the big gap in early voting that Democrats enjoyed four years ago has shrunk and, in some states, even become a deficit. Only when early-voting numbers started to come in did market prices begin to diverge from polling averages in 2024.

The third and final pro-Trump theory is that he is more likely than Ms Harris to outperform the polls because he did so in each of his past two campaigns. There are good reasons to expect this trend to continue. His supporters tend to distrust the media and universities, which account for most non-partisan public polling. This may make them less likely to participate in surveys. Pollsters use weighting methods to try to overcome this bias. But such efforts fail if Trump voters are less willing to share their views than are others with the same demographic profile.

Three Kam-terarguments

Or is it Ms Harris whom models are underestimating? Democrats offer three strong arguments for this. The first is an alternative explanation for previous polling errors that favoured Mr Trump. In 2016 many pollsters failed to weight their surveys by educational attainment. Because voters who graduated from college are very likely to talk to pollsters, this caused surveys to under-sample Mr Trump’s working-class supporters. By 2020 education weighting was de rigueur, but the incumbent beat his polls again, by an even greater margin.

Trump fans may believe that their man’s backers simply cannot be polled. But the 2020 election took place amid a once-in-a-century pandemic, in which Democrats were far more likely to stay at home, and so had time to participate in surveys, than Republicans were. Polls of the Trump-Biden race taken before covid began came much closer to the final result than subsequent ones did. No such imbalance in free time exists this year.

Most pollsters have also adopted “recall-vote weighting”, adjusting their samples so that the share of people who say that they supported Mr Biden and Mr Trump in 2020 matches the actual result. More respondents generally claim they voted for the winner of the past election than the number who actually did. As a result, recall weighting tends to increase vote shares for the party whose candidate lost last time: in this case, the Republicans. This method makes polls less accurate, but many firms lowballed Mr Trump for two straight cycles. Abundant recall weighting this time may have overshot the mark, which would raise the probability of a polling error in Ms Harris’s favour.

The second argument is that Ms Harris may have an advantage in the turnout battle. During Barack Obama’s two terms, Democrats depended on less reliable voters, and got walloped in midterm elections. But the Trump-era realignment, which has pushed college-educated voters towards Democrats and working-class ones towards Republicans, has reversed this dynamic. Since 2017 Democrats have consistently outperformed in lower-turnout contests. The “top-two” primary in Washington state, a reliable predictor of general elections, suggests a more Democratic national environment than current polls do, for instance.

The third argument is that Mr Trump’s tactics and strategy seem misaligned. He has given himself a tough task by focusing his campaign on appealing to groups with a low propensity to vote, such as young men and non-whites without college degrees. A candidate who is counting on such supporters should, as Mr Obama did, invest in a robust “ground game” to maximise turnout among expected backers.

Yet Mr Trump has outsourced most of this to an untested outfit funded by Mr Musk, called the America PAC. It is true that Hillary Clinton also enjoyed an advantage in field offices and among canvassers in 2016. But Mr Trump benefited from far more support from college-educated white voters that year than he is expected to in 2024.

The arguments are persuasive on both sides. So models are probably right to land around 50/50. But that is assuming the candidate who wins enough states to secure 270 electoral votes will also become president. And, if history is any guide, Mr Trump is unlikely to accept defeat. With six of the nine Supreme Court justices appointed by Republicans, a repeat of 2000—when the court handed the presidency to George W. Bush in an election decided by 537 votes—gives Mr Trump one more potential path back to the White House.

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Economics

The Fed is likely cutting rates again Thursday. Everything you need to know

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Federal Reserve Board Chairman Jerome Powell holds a press conference following a two-day meeting of the Federal Open Market Committee on interest rate policy in Washington, U.S., September 18, 2024. REUTERS/Tom Brenner

Tom Brenner | Reuters

The Federal Reserve likely will stick to the business at hand when it wraps up its meeting Thursday with another interest rate cut, but will have its eye on the future against a backdrop that suddenly has gotten a lot more complicated.

Financial markets are pricing in a near-certainty that the central bank’s Federal Open Market Committee will lower its benchmark borrowing cost by a quarter percentage point as it seeks to “recalibrate” policy for an economy that is seeing the inflation rate moderate and the labor market soften.

The focus, though, will turn to what’s ahead for Chair Jerome Powell and his Fed colleagues as they navigate a shifting economy — and the political earthquake of Donald Trump’s stunning victory in the presidential race.

“We think Powell will refuse to give any early judgment on the implications of the election for the economy and rates, and will seek to be a source of stability and calm,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said in a a note issued before the election’s outcome was known.

In keeping with policymakers’ historical desire to stay above the political fray, Powell “will say the Fed will take the time it needs to study the new administration’s plans” then will “refine this assessment as actual policies are developed and enacted,” Guha added.

So while the immediate action will be to stay the course and enact the cut, which equals 25 basis points, the market’s attention likely will turn to what the committee and Powell have to say about the future. The fed funds rate, which sets what banks charge each other for overnight lending but often influences consumer debt as well, is currently targeted in a range between 4.75%-5.0%.

Market pricing currently favors another quarter-point cut in December, followed by a January pause then multiple reductions through 2025.

Preparing for Trump

But if Trump’s agenda — tax cuts, higher spending and aggressive tariffs — comes to fruition, it could have a meaningful impact on a Fed trying to right-size policy after the mammoth rate hikes aimed at controlling inflation. Many economists believe another round of isolationist economic moves from the president-elect could reignite inflation, which held below 3% during Trump’s entire first-term despite a similar recipe.

Trump was a frequent critic of Powell and the Fed during his term, which ran from 2017-21, and is in favor of low interest rates.

“Everyone is on the lookout for future rate cuts and whether anything is telegraphed,” said Quincy Krosby, chief global strategist at LPL Financial. “Also, however, there’s the question of whether or not they can declare victory on inflation.”

Any answers to those questions would be largely left to Powell’s post-meeting news conference.

Though the committee will release its joint decision on rates, it will not provide an update on its Summary of Economic Projections, a document issued quarterly that includes consensus updates on inflation, GDP growth and unemployment, as well as the anonymous “dot plot” of individual officials’ interest rate expectations.

Beyond the January pause, there’s considerable market uncertainty about where the Fed is heading. The SEP will be updated next in December.

“What we’re going to hear more and more of is the terminal rate,” Krosby said. “That’s going to come back into the lexicon if yields continue to climb higher, and it’s not completely associated with growth.”

So where’s the end?

Traders in the fed funds futures market are betting on an aggressive pace of cuts that by the close of 2025 would take the benchmark rate to a target range of 3.75%-4.0%, or a full percentage point below the current level following September’s half percentage point cut. The Secured Overnight Financing Rate for banks is a bit more cautious, indicating a short-term rate around 4.2% at the end of next year.

“A key question here is, what’s the end point of this rate cut cycle?” said Bill English, the Fed’s former head of monetary affairs and now a finance professor at the Yale School of Management. “Fairly soon, they’ve got to think about, where do we think this rate cut period changes with the economy looking pretty strong. They may want to take a pause fairly soon and see how things develop.”

Powell also may be called on to address the Fed’s current moves to reduce the bond holdings on its balance sheet.

Since commencing the effort in June 2022, the Fed has shaved nearly $2 trillion off its holdings in Treasurys and mortgage-backed securities. Fed officials have said that the balance sheet reduction can continue even while they cut rates, though Wall Street expectations are for the run-off to end as soon as early 2025.

“They’ve been happy to just kind of leave that percolating in the background and they probably continue to do that,” English said. “But there’s going to be a lot of interest over the next few meetings. At what point do they make a further adjustment to the pace of runoffs?”

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Economics

Donald Trump wins big and fast

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IT IS AN extraordinary comeback—or, as Donald Trump triumphantly put it in West Palm Beach, Florida, in the early hours of November 6th, “a political victory that our country has never seen before”. After losing four years ago he has survived impeachment, conviction as a felon, numerous other indictments and two assassination attempts, and will become America’s 47th president, to add to his stint as the 45th. He becomes the oldest man ever to win the White House.

Many had expected a long wait for the result of an extremely close election to become clear. In the event, the outcome was evident within hours. Mr Trump looked set to win all seven of the critical swing states: he triumphed in North Carolina, Georgia, Pennsylvania and Wisconsin, and had strong leads in Michigan, Arizona and Nevada. That translates into a decisive advantage in the electoral college.

It appears that Mr Trump was able to draw support from both urban and rural voters at levels notably higher than in his contest against Joe Biden in 2020. In state after state, Mr Trump performed better than he had in 2020. In Florida, for example, where he won by three percentage points last time, his margin is on track to surge to 12 points. And although opinion-poll aggregates had consistently shown Kamala Harris to be ahead in the national popular vote, it seems that Mr Trump may have won that too. Just as in 2016 and 2020, in other words, the polls underestimated Mr Trump’s support.

What went wrong for Ms Harris? For one thing, her advantage among women voters, on whom Democrats were pinning their hopes, turned out to be smaller than expected. The gender gap, between the votes of men and women, actually narrowed, from 23 points in 2020 to 20, according to exit polls. Among Hispanic voters, Mr Trump made striking inroads, improving his margin by ten percentage points compared with 2020, according to CNN’s exit poll. The trend was particularly strong among Hispanic men: Joe Biden won their vote by a margin of 23 points; this time Mr Trump was on track to prevail among them by a margin of ten points. More broadly, dissatisfaction with high inflation and immigration contributed to a sense among voters that the country was on the wrong track, for which they naturally blame the incumbent. Much as Ms Harris sought to present herself as the candidate of change, she was stuck with her association with the current administration.

As well as the White House, the Republicans also wrested back control of the Senate. It was always going to be hard for Democrats to hold on to their slender majority in that chamber, given that they were defending a disproportionate number of seats (a third of which are up for election in each election cycle). Not only did Republicans take the vacant seat in West Virginia, as expected; they also flipped Ohio and Montana and prevailed in a close contest in Nebraska. The upsets Democrats hoped for in Florida and Texas failed to materialise. Republican control of the Senate smooths the way for Mr Trump to make important appointments—from cabinet secretaries to generals to Supreme Court justices—that require Senate confirmation.

Whether the Republicans complete their sweep by retaining control of the House of Representatives is still not clear. Results in California, to arrive later, will determine that. But Mr Trump, in his victory speech, was confident that the House would be his, too.

“This will truly be the golden age of America,” he declared. Few will question that the country is indeed entering a new age. Whether Mr Trump will truly “heal” America, as he promised, is more debatable. Beyond America’s borders, too, the consequences are momentous. From tariffs to climate change to Ukraine, the world must brace itself for Trump II.

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Economics

Donald Trump claims victory

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DONALD TRUMP claimed victory in the 2024 presidential election, saying that “America has given us an unprecedented and powerful mandate”. Pennsylvania was called for the Republican shortly after 2am Eastern time. He had already taken a clear lead in the race, having earlier claimed the swing states of North Carolina and Georgia. Kamala Harris’s path to victory vanished, as she badly underperformed Joe Biden’s showing of four years ago.

Ms Harris’s fortunes shrank remarkably quickly. Within a few hours of the first polls closing it had become clear that she was failing to make headway against Mr Trump. It appears that Mr Trump was able to draw support from both urban and rural voters at levels notably higher than in his contest against Mr Biden in 2020.

Mr Trump was speaking during the early hours of November 6th, at Palm Beach County convention centre, in Florida. In the previous days opinion polls had appeared to show that momentum favoured Ms Harris, whereas the former president had appeared tired and frustrated with his campaign. That makes his apparent success all the more remarkable. Republicans also claimed control of the Senate, as had been widely expected, and seemed well placed to take the House too.

Beyond the key battlegrounds, the picture had been similarly dispiriting for the Harris campaign. In Virginia, which Mr Biden won comfortably in 2020, Ms Harris eked out only a narrow victory, though even there she was lagging behind Mr Biden’s performance in suburban counties such as Loudoun, outside Washington, DC. That was a concerning trend—and a hint of her eventual losses in Pennsylvania. Her prospects in other parts of the Midwest, including in Michigan and Wisconsin, where suburban voters were crucial to her chances, looked no better. In Florida, Ms Harris did worse than Mr Biden, who lost by just over three percentage points in 2020.

A pressing question for Ms Harris—and the Democrats more widely—is why they did so poorly. As incumbents in other parts of the world discovered, voters were evidently ready to punish those in office. In addition, expectations that women would turn out in sufficiently large numbers to elect the first female president proved wrong. Mr Trump, meanwhile, appears to have done enough to fire up non-white voters, including Latinos and black male voters, to broaden his appeal beyond his showing in previous presidential elections. As a political comeback story, it is a striking one.

This story has been updated

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