U.S. Political Uncertainty Is Affecting Both Consumers and Corporates

With the November 5 presidential election approaching, many consumers and businesses remain cautious, holding off major financial decisions. A survey released this week showed consumers remain particularly uncertain concerning next year business conditions, weighting on their future expectations. In addition, small-business optimism also faced headwinds, with investment plans scaled back amid heightened uncertainty. However, sentiment is expected to improve post-election, potentially more significantly if the political landscape shifts.

In early October, the University of Michigan’s survey showed a decline in consumer sentiment, amid frustration over persistently high prices and elevated political uncertainty. As the November 5 election approaches, consumers are cautious, with future expectations tied to the outcome. The main consumer sentiment index dropped to 68.9 from 70.1. The current conditions index fell to 62.7 (from 63.3), and future expectations declined to 72.9 (from 74.4).

Year-ahead inflation expectations rose to 2.9% (from 2.7%), while long-term expectations dipped to 3.0% (from 3.1%). Despite easing inflation, households remain concerned about prices rising faster than their incomes, with their current financial outlook at its lowest since late 2022.

In the meantime, "with the upcoming election on the horizon, some consumers appear to be withholding judgment about the longer-term trajectory of the economy," said Joanne Hsu, head of surveys of consumers at the university. In this context, the share of U.S. consumers uncertain about business conditions over the next year remained unchanged at 51%* in October (highest on record).

Earlier this week, data showed small-business sentiment remained restrained ahead of November’s presidential election, with uncertainty reaching the highest level on record. That has caused businesses to delay capital-spending plans and inventory investments.

The NFIB’s Small Business Optimism Index saw a slight increase in September, rising to 91.5 from 91.2. Business uncertainty surged by 11 points to a record high of 103. Fewer business owners planned capital investments, with that figure dropping five points to 19%, the lowest since April 2023. A net 12% of businesses reduced inventories, the weakest level since May 2020. Nominal sales dropped further, with a net negative 17%—the lowest this year.

Conlusion

(1) Sticky inflation is weighing on consumer sentiment — but the bigger dilemma is uncertainty ahead of the election. Whatever who wins, consumer sentiment will probably rise after the U.S. election, with a larger improvement if Trump wins because Republicans have been more pessimistic during Biden’s term.

(2) The September NFIB report indicates that pre-election uncertainty is hampering small businesses, leading many to delay, reduce, or cancel investment plans, which looks coherent with other surveys including the quarterly CFO survey.

(3) All surveys confirm that political uncertainty has never been so high in recent history, affecting both consumers and corporates. I still see this factor as a key reason behind recent hiring slowdown. In the meantime, adverse weather conditions will also dampen growth in the short term, giving Fed room to keep easing its monetary policy. However, after the election, a rebound will take place no matter who will be elected. In addition, if Trump wins (as I have been expecting for more than 18 months), both GDP and inflation could surprise upward. A GOP clean sweep would exacerbate this phenomenon in the first year with Trump focusing more on domestic policy rather than on foreign policy.