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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.

Economics

U.S. tariff rates under Trump will be higher than the Smoot-Hawley levels from Great Depression era

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U.S. President Donald Trump holds a chart next to U.S. Secretary of Commerce Howard Lutnick as Trump delivers remarks on tariffs in the Rose Garden at the White House in Washington, D.C., on April 2, 2025.

Carlos Barria | Reuters

The tariff policy outlined by President Donald Trump on Wednesday appears set to raise the level of U.S. import duties to the highest in more than 100 years.

The U.S. introduced a baseline 10% tariff on imports, but also steep country-by-country rates on some major trading partners, including China. The country-by-country rates appear to be related to the trade deficit the U.S. has with each trading partner.

Sarah Bianchi, Evercore ISI chief strategist of international political affairs and public policy, said in a note to clients late Wednesday that the new policies put the effective tariff rate above the level of around 20% set by 1930’s Smoot-Hawley Tariff Act, which is often cited by economists as a contributing factor to the Great Depression.

“A very tough and more bearish announcement that pushes the overall U.S. weighted average tariff rate to 24%, the highest in over 100 years – and likely headed to as high as 27% once anticipated 232s are complete,” Bianchi wrote. The “232s” is a reference to some sector-specific tariffs that could be added soon.

JPMorgan’s chief U.S. economist Michael Feroli came up with similar results when his team crunched the numbers.

“By our calculations this takes the average effective tariff rate from what had been prior to today’s announcement around 10% to just over 23%. … A White House official mentioned that other section 232 tariffs (e.g. chips, pharma, critical minerals) are still in the works, so the average effective rate could go even higher. Moreover, the executive order states that retaliation by US trading partners could result in even higher US tariffs,” Feroli said in a note to clients.

More downside risk for the economy going forward, says Apollo Global's Torsten Slok

An estimate from Fitch Ratings was in the same range, with a report saying the tariff rate would hit its highest level since 1909.

Trump referenced the Smoot-Hawley Act in his Rose Garden remarks on Wednesday. The president said the issue was not the tariffs imposed in 1930 but the previous decision to remove the higher tariffs that existed earlier in the 20th century.

“It would have never happened if they had stayed with the tariff policy. It would have been a much different story. They tried to bring back tariffs to save our country, but it was gone. It was gone. It was too late,” Trump said.

The full economic impact of the new tariffs will likely depend on how long they are in place and if other countries retaliate. Trump and Treasury Secretary Scott Bessent have indicated that the country-by-country tariffs could come down if those trade partners change their policies.

JPMorgan global economist Nora Szentivanyi warned that Trump’s tariffs were likely to push the U.S. and global economy into a recession this year if they are sustained.

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Economics

The Federal Reserve is not likely to rescue markets and economy from tariff turmoil anytime soon

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U.S. Federal Reserve Chair Jerome Powell and U.S. President Donald Trump.

Craig Hudson | Evelyn Hockstein | Reuters

Now that President Donald Trump has set out his landmark tariff plans, the Federal Reserve finds itself in a potential policy box to choose between fighting inflation, boosting growth — or simply avoiding the fray and letting events take their course without intervention.

Should the president hold fast to his tougher-than-expected trade policy, there’s a material risk of at least near-term costs, namely the potential for higher prices and a slowdown in growth that could turn into a recession.

For the Fed, that presents a potential no-win situation.

The central bank is tasked with using its policy levers to ensure full employment and low prices, the so-called dual mandate of which policymakers speak. If tariffs present challenges to both, choosing whether to ease to support growth or tighten to fight inflation won’t be easy, as each courts its own peril.

“The problem for the Fed is that they’re going to have to be very reactive,” said Jonathan Pingle, chief U.S. economist at UBS. “They’re going to be watching prices rise, which might make them hesitant to respond to any growth weakness that materializes. I think it’s certainly going to make it very hard for them to be preemptive.”

Under normal conditions, the Fed likes to get ahead of things.

If it sees leading gauges of unemployment perk up, the Fed will cut interest rates to ease financial conditions and give companies more incentive to hire. If it sniffs out a coming rise in inflation, it can raise rates to dampen demand and bring down prices.

So what happens when both things occur at the same time?

Risks to waiting

The Fed hasn’t had to answer that question since the early 1980s, when then-Chair Paul Volcker, faced with such stagflation, chose to uphold the inflation side of the mandate and hike rates dramatically, tilting the economy into a recession.

In the current case, the choice will be tough, particularly coming on the heels of how the Jerome Powell-led central bank was flat-footed when prices started rising in 2021 and he and his colleagues dismissed the move as “transitory.” The word has been resurrected to describe the Fed’s general view on tariff-induced price increases.

“They do risk getting caught offsides with the potential magnitude of this kind of price increase, not unlike what happened in 2022 where, they might might feel the need to respond,” Pingle said. “In order for them to respond to weakening growth, they’re really going to have to wait until the growth does weaken and makes the case for them to move.”

To be sure, the Trump administration sees the tariffs as pro-growth and anti-inflation, though officials have acknowledged the potential for some bumpiness ahead.

“It’s time to change the rules and make the rules be stacked fairly with the United States of America,” Commerce Secretary Howard Lutnick told CNBC in a Thursday interview. ” We need to stop supporting the rest of the world and start supporting American workers.”

However, that could take some time as even Lutnick acknowledged that the administration is seeking a “re-ordering” of the global economic landscape.

Like many other Wall Street economists, Pingle spent the time since Trump announced the new tariffs Wednesday adapting forecasts for the potential impact.

Bracing for inflation and flat growth

The general consensus is that unless the duties are negotiated lower, they will take prospects for economic growth down to near-zero or perhaps even into recession, while putting core inflation in 2025 north of 3% and, according to some forecasts, as high as 5%. With the Fed targeting inflation at 2%, that’s a wide miss for its own policy objective.

“With price stability still not fully achieved, and tariffs threatening to push prices higher, policymakers may not be able to provide as much monetary support as the growth picture requires, and could even bind them from cutting rates at all,” wrote Seema Shah, chief global strategist at Principal Asset Management.

Traders, however, ramped up their bets that the Fed will act to boost growth rather than fight inflation.

As is often the reaction during a market wipeout like Thursday’s, the market raised the implied odds that the Fed will cut aggressively this year, going so far as to put the equivalent of four quarter-percentage-point reductions in play, according to the CME Group’s FedWatch tracker of futures pricing.

Shah, however, noted that “the path to easing has become narrower and more uncertain.”

Fed officials certainly haven’t provided any fodder for the notion of rate cuts anytime soon.

In a speech Thursday, Vice Chair Philip Jefferson stuck to the Fed’s recent script, insisting “there is no need to be in a hurry to make further policy rate adjustments. The current policy stance is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate.”

Taking the cautious tone a step further, Governor Adriana Kugler said Wednesday afternoon — at the same time Trump was delivering his tariff presentation in the Rose Garden — that she expects the Fed to stay put until things clear up.

“I will support maintaining the current policy rate for as long as these upside risks to inflation continue, while economic activity and employment remain stable,” Kugler said, adding she “strongly supported” the decision in March to keep the Fed’s benchmark rate unchanged.

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Economics

Layoff announcements surge to the most since the pandemic as Musk’s DOGE slices Federal labor force

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Employees of the Department of Health and Human Services (HHS) hug each other as they queue outside the Mary E. Switzer Memorial Building, after it was reported that the Trump administration fired staff at the Centers for Disease Control and Prevention and at the Food and Drug Administration, as it embarked on its plan to cut 10,000 jobs at HHS, in Washington, D.C., U.S., April 1, 2025. 

Kevin Lamarque | Reuters

A surge in federal government job cuts contributed to a near record-setting pace for announced layoffs in March, exceeded only by when the country shut down in 2020 for the Covid pandemic, according to a report Thursday from job placement firm Challenger, Gray & Christmas.

Furloughs in the federal government totaled 216,215 for the month, part of a total 275,240 reductions overall in the labor force. Some 280,253 layoffs across 27 agencies in the past two months have been linked to the Elon Musk-led Department of Government Efficiency and its efforts to pare down the federal workforce.

The monthly total was surpassed only by April and May of 2020 in the early days of the pandemic when employers announced combined reductions of more than 1 million, according to Challenger records going back to 1989.

“Job cut announcements were dominated last month by Department of Government Efficiency [DOGE] plans to eliminate positions in the federal government,” said Andrew Challenger, senior vice president and workplace expert at the firm. “It would have otherwise been a fairly quiet month for layoffs.”

However, DOGE has continued to cut aggressively across the government.

Various reports have indicated that the Veterans Affairs department could lose 80,000 jobs, the IRS is in line for some 18,000 reductions and Treasury is expected to drop a “substantial” level of workers as well, according to a court filing.

The year to date tally for federal government announced layoffs represents a 672% increase from the same period in 2024, according to Challenger.

To be sure, the outsized layoff plans haven’t made their way into other jobs data.

Weekly unemployment claims have held in a fairly tight range since President Donald Trump took office. Payroll growth has slowed a bit from its pace in 2024 but is still positive, while job openings have receded but only to around their pre-pandemic levels.

However, the Washington, D.C. area has been hit particularly hard by the announced layoffs, which have totaled 278,711 year to date for the city, according to the report.

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