If you believe the television spots, the mid-term elections are about one thing (besides vicious attack ads) – Iraq. No doubt a key issue, but as Americans head to the polls on Tuesday, the manufacturing industry would be well-served by keeping an eye on the results.
There are three basic scenarios that could occur; a Democratic sweep of Congress, a split decision, or a Republican sweep (although that last option doesn’t seem particularly likely at the moment.)
Any of these scenarios could prove helpful to manufacturers, according to Bank of America Chief Investment Strategist Joseph Quinlan.
“For the short term, manufacturers will have some breathing space,” Quinlan said. “The real issue will be in 2008.”
The National Association of Manufacturers released its ratings for the current Congress, based on how well they support American manufacturing. According to NAM’s data, Senators running for re-election who have shown some of the strongest support for NAM’s agenda include Mike DeWine (R-Ohio), Rick Santorum (R-Pa.), James Talent (R-Mo.) and Jon Kyl (R-Ariz.), says Jay Timmons, NAM's senior vice president of policy and government relations.
Of these, Santorum appears to be most in jeopardy, if the polls can be trusted. DeWine and Talent are also in tough battles, while Kyl should be OK.
(While the NAM does not run a political action committee, it does take notice of politicians who support the manufacturing agenda and lobby on behalf of their membership.)
The Three Scenarios
A Democratic sweep is unlikely, according to most analysts. If the unexpected were to happen, however, it could be read by foreign markets as a move towards protectionism, and push Capitol Hill into gridlock.
“Wall Street would actually rally off this gridlock, because gridlock really means nothing getting done,” said Robert Froehlich, Chairman, Investor Strategy Committee of DWS Scudder. “On Wall Street, no news is good news from politicians.”
Quinlan also pointed out that a Democratic sweep would likely weaken the dollar in an orderly fashion, which could help manufacturers.
“The weaker the dollar, the more competitive the U.S. can become globally,” he said.
Movement on the Doha trade talks could also prove difficult, and the Trade Promotion Authority (TPA), which expires in July 2007, would more than likely not be renewed.
According to President Bush, the TPA, also known as fast track, has allowed for freer international markets without requiring an amendment by Congress, instead simply an up-or-down vote. Democrats, however, are not expected to support its renewal in 2007. The combination of the TPA renewal and the Doha freeze due to a deadlock on farm trading has many believing that the chance for real trade agreements will be put on hold until 2008.
Generally speaking, the U.S. manufacturing community could probably count on tighter environmental restrictions at home should the Dems roll to victory on Tuesday.
Jim Lucier, of Prudential Equity Group, said that with a Democratic House majority within reach, environmental activists are targeting what he called the single most important symbolic target they can find: House Resources Committee Chairman Richard Pombo’s (R-Calif.) Tracy, Calif., district.
“If Pombo loses, the cause of opening natural resources in the Rocky Mountains and the Outer Continental Shelf could be set back for years,” Lucier said.
Meanwhile, Lucier doesn’t believe existing nuclear power plants are at risk if Harry Reid (D-Nev.) becomes Senate Majority Leader, but he does see Reid doing anything he can in the final two years of the Bush administration to keep the Yucca Mountain Nuclear Waste Repository from becoming a reality.
If the Republicans retain the Senate, but the Democrats take the House, gridlock would still be in play. The biggest concern for manufacturers in this case could be what Federal Reserve Chairman Ben Bernanke does with interest rates.
“The Democrats can pass all they want in the House but nothing major would be likely to get through the Republican-controlled Senate, nor would it get by the Republican Presidential veto at the White House,” Froehlich said.
Finally, should we wake up Wednesday morning to a Republican sweep, don’t expect much to be accomplished in the last two years of the Bush Administration.
“No major legislation initiatives will come off of capitol hill,” Quinlan said, predicting nothing more than a “lame duck” session until the 2008 presidential election.
Keeping with the status quo would be the best outcome for foreign investors and hopes would stay afloat for Doha. Chances would also be better that the TPA would be extended; however, another Republican Congress would not necessarily rubber stamp that part of the 2002 Trade Act.
Quinlan predicts a downturn in the next three to six months, as part of the normal business cycle.
“There are a lot of cross currents,” Quinlan said. “The thing to remember is the weaker the dollar, the more competitive the U.S. can become globally.”
Looking at the statistics from 2005, when the current Congress took office, interest rates have dropped slightly, unemployment is down and the consumer price index has seen a sharp decline. All this spells a better economy now than January 2005, and voters do tend to vote with their pocketbooks. But the impact on voter mindset of the ongoing turmoil in Iraq is an unknown.
For the manufacturing industry, status quo on the political front is probably most palatable. Despite recent signs of a slowdown, U.S. manufacturers as a whole are faring much better than is generally portrayed in the mainstream media, and a dramatic change on the political landscape could put that at risk.