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What now for US economy after midterm elections?

Republicans' big gains in Congress will test the Wall Street adage that political gridlock is good.

world Updated: Nov 03, 2010 08:14 IST

Republicans' big gains in Congress will test the Wall Street adage that political gridlock is good. Putting more power in the hands of Republican politicians who campaigned on a smaller government platform means Congress is less likely to offer a hand should the economy stumble again.

Republicans will win enough seats to take control of the House of Representatives, networks projected, and made big Senate gains on Tuesday.

That leaves the US Federal Reserve as the primary source of support, suggesting ultra-low interest rates are here for quite a while, and the central bank will probably launch another round of money printing to try to rev up the recovery.
Here is a look at some of the economic implications:

Will the economy get a post-election bump?
Probably not. Consumer spending, the primary growth engine, has been solid but is not expected to pick up much more until the job and housing markets improve. A Republican-heavy Congress will not be in a hurry to ramp up government spending after last year's stimulus money runs out. State and local governments are strapped for cash, which blunts another potential source of growth. Business investment was extraordinarily strong earlier this year but has begun to taper off.

What about hiring prospects?
More than 25 million people are either unemployed, underemployed or so discouraged that they have given up looking for work. Some analysts argue that the end of election season removes one source of uncertainty and could encourage companies to step up hiring. However, there are plenty of reasons remaining for businesses to feel unsettled. The list of worries includes the risk of another housing downturn, a global trade war, or a recurrence of Europe's sovereign debt troubles. With corporate profits fading, hiring prospects still look modest.

Will wall street like it?
Maybe not as much as usual. Markets rallied on Tuesday in part because investors hoped big Republican wins would usher in a more business-friendly government. The gridlock-is-good theory picked up adherents in 1994 when President Bill Clinton's Democrats suffered big congressional losses, forcing the two parties to compromise. The worry this time is that Congress will not be willing to act quickly should the economy falter. Investors have not forgotten how violently markets reacted in 2008 when Congress initially rejected a bank bailout bill.

Where does this leave the fed?
Lonely. The Fed cut its benchmark interest rate to near zero in December 2008, and has nearly tripled its balance sheet to $2.3 trillion to try to ward off another Great Depression. It is widely expected to announce another asset-buying program at the conclusion of its policy-setting meeting on Wednesday. The economy has looked shaky as the fiscal stimulus wears off. If it weakens further, the Fed's options are limited. Many economists worry that printing money won't do much to drive growth because interest rates are already low and big companies are flush with cash and don't need to borrow.

First Published: Nov 03, 2010 08:11 IST