Democrats win midterms but core economic pressures remain
Mark Zandi says high living costs and AI-dependent growth persist despite the shift in congressional power.
By Ella Cox ·
Democratic victories in the recent midterm elections have altered the balance of power in Washington, yet analysts say the fundamental pressures on the U.S. economy are unlikely to change immediately. Mark Zandi, chief economist at Moody's Analytics, stated that the economy remains vulnerable and that even a moderate shock could push the nation into recession. He noted that while the current situation is not yet a crisis, the risks have not disappeared.
Zandi argued that major economic policies are driven by the executive branch rather than Congress. He pointed to the Iran war, tariff policies, and strict immigration measures as examples of actions taken by the administration. Because these policies were not created through legislative processes, a change in the majority party in Congress does not automatically reverse them. Zandi predicted that these measures will continue to restrict growth and apply upward pressure on inflation and interest rates.
A central concern is the heavy reliance on artificial intelligence investment for economic expansion. Zandi described this dependency as a downside risk, noting that AI-driven growth is closely tied to stock market valuations. He observed that the labor market is not functioning smoothly, adding to the economic fragility. Local opposition to data center construction also played a role in the election, particularly among Democratic voters, though many ranked living costs and corruption as more urgent issues.
Economic data presents a mixed picture. Third-quarter GDP growth accelerated to 3.4% annually, and consumer spending rose by 3.8%. The unemployment rate stood at 4.2%, with layoffs near levels not seen since 1969. However, inflation has outpaced wage growth. The Consumer Price Index rose 3.7% year-over-year in September, a sharp increase from 2.3% in April 2025 when reciprocal tariffs were announced. Real wages fell by 0.7% in the same period, meaning paychecks have not kept up with rising prices.
Tariffs represent one area where bipartisan compromise is possible. Gary Cohn, who served as director of the National Economic Council in Trump's first term, told CNBC on Wednesday that there is broad agreement on using tariffs to protect American workers from unfair competition, specifically with China. He suggested that making tariffs into law through Congress would make them harder for a future president to revoke via executive order. Cohn viewed the current trade barriers with Canada and Mexico as less effective.
Morgan Stanley analysts expect Democrats to attempt to reverse cuts to SNAP and Medicaid, which were included in the One Big Beautiful Bill Act. The federal debt has grown by more than $4 trillion since January 2025, reaching $40.5 trillion. Net interest on the debt for fiscal year 2026 is $1.5 billion, the third largest spending item after Social Security and Medicare. The fiscal deficit for 2026 is just under $2 trillion, or 6.1% of GDP. Goldman Sachs economist Jan Hatzius warned that Democrats may use debt ceiling negotiations to extract policy concessions, such as limiting the scope of the Iran war or expanding healthcare coverage.
Despite these risks, Wall Street forecasts continued expansion. Joseph Brusuelas, chief economist at RSM, projects growth rates around 2.5%, above the long-term trend. He sees the election as an opportunity to restructure the USMCA agreement after eighteen months of trade tensions. Brusuelas estimates the probability of a recession in the next twelve months at 15%, a figure he said was not changed by the election results.
