Welcome back. The US economy is colossal. Its GDP, based on purchasing power parity, is greater than all other G7 nations’ combined. That means statements about the American economy as a whole are particularly prone to generalisations that overlook vast differences on the ground.
This week I explore one dimension of the US economy: the split between Democratic and Republican voters. And I assess what it means for the remainder of US President Donald Trump’s second term.
The Philadelphia Federal Reserve’s Partisan Conflict index — which tracks the degree of political disagreement among US politicians at the federal level — is elevated relative to the past few decades.
This partly reflects rising divisions among voters. The overall share of Americans who consistently express conservative or liberal opinions has doubled over the past two decades to more than 20 per cent, according to the Pew Research Center.
Partisan beliefs affect the economy through their impact on perceptions. “Consumers tend to adopt an optimistic or pessimistic perspective based on whether their favourite party controls the White House,” notes Matt Gertken, a chief strategist at BCA Research.
Right now, economic sentiment appears to be particularly polarised. Since the 2024 US election, confidence in the economy has been at opposite ends of the spectrum for red and blue voters, according to the latest Gallup polling.
University of Michigan surveys underscore the division. Democrats expect prices to rise 9.4 per cent over the next year; Republicans reckon they will increase by just 1 per cent, and are significantly more optimistic about stock market performance in the coming 12 months too.
Part of this comes down to wildly different beliefs about what Trump’s policy agenda can deliver. Democrats are much more likely to believe that tariffs will push up domestic prices and will not result in a manufacturing jobs boom, according to Gallup surveys in April.
In contrast, Republicans are more willing to endure economic pain from import duties, as they believe they will generate benefits over time. More than 50 per cent of red voters are willing to experience at least a year of tariff-related disruption, whereas half of Democratic voters do not want to experience any. (I outlined in the April 13 edition of this newsletter why nostalgia for manufacturing jobs will make the US poorer.)
It would, however, be simplistic to dismiss these differences as purely a function of social media bubbles, culture wars and blind partisanship. That’s because actual economic circumstances between these groups differ too.
Indeed, Republicans and Democrats tend to live in “fundamentally contrasting economies”, says Mark Muro, a senior fellow at the Brookings Institution.
“Blue areas represent the office economy, dense coastal cities, with high wages and strong universities, where work is focused on high-end service pursuits such as business and finance,” he adds. “Red places are mostly rural and small-town spaces oriented towards farm activities, factories and energy exploitation. These places have borne the brunt of recent waves of globalisation.”
For measure, Trump’s 2024 winning base represents 86 per cent of the US’s total counties, but just 38 per cent of its GDP, according to Muro’s research. (That would still make red America the third-largest economy worldwide in nominal terms, behind blue America and China.)
State-level data shows red states are squeezed most by prevailing economic conditions (high interest rates and higher price levels). After all, median household incomes tend to be lower in Republican geographies.
Indeed, quarterly transitions into serious household debt delinquency have surged faster in the most populated Republican states.
Since the beginning of 2021, the price level has risen faster than the US average of 22.1 per cent in more red states than blue states, according to estimates provided by Moody’s Analytics.
A recent study also finds the cheapest US products have seen the fastest increases in price since the pandemic, which implies lower-income households have faced an even higher inflation rate.
The optimistic sentiment — combined with their difficult economic circumstances — suggests Republican voters are banking on Trump’s policy agenda to make things better. But the US president’s theory of change has several holes in it.
“Trump’s plan between now and the midterm elections might undermine the support of low-income or working-class voters who swung to support him in 2024,” says Gertken. “The economy is expected to slow somewhat as wage and income growth slow down and jobs become harder to get. Meanwhile inflation could pick up due to tariffs.”
The tax-cutting “big beautiful” bill, which Trump signed into law on Friday, is regressive in its impact on household incomes. The legislation will reduce health insurance and food assistance support, which both support low-income Americans.
The combination of tax changes and welfare cuts will drag down after-tax incomes by 2.3 per cent, or $560, for the poorest 20 per cent, according to a Yale Budget Lab analysis. It is expected to raise short-term growth by 0.2 percentage points, but that is expected to be offset by Trump’s tariffs plans.
The think-tank reckons that the levies in place as of mid-June — equating to an overall effective import duty rate of around 14.7 per cent after substitution effects are considered — will hurt lower-income households most, too.
It estimates these tariffs to raise the price level by 1.5 per cent in the short term, with the burden on the first decile of earners being more than three times that of those at the top.
The gap between expectation and the reality of the president’s agenda is also reflected in businesses.
Confidence among small businesses — a key Republican constituent — bounced following Trump’s election. But it has since cooled off. Indeed, tariffs are particularly problematic for companies with smaller buffers and tighter margins.
Trump’s broader plans, including to “drill baby drill”, deregulate and boost manufacturing, promise to boost sectors with lots of Republican donors, including oil and banking. This might explain why Republicans are more optimistic about the stock market.
And yet, data compiled by Kai Wu, founder at Sparkline Capital, finds that Democratic stocks (or those with significantly more Democratic than Republican donors) have been outperforming Republican stocks since Trump’s election. (Although part of this is driven by tech firms, a sector that tends to lean Democratic.)
“Trump has thrown out thestandardRepublican economic playbook in favour of an unorthodoxtariff policy,” says Wu. “The ensuing uncertainty is weighing on US stocks — including those of his politicalsupporters.”
“A lot still needs to happen for Trump’spolicies to translate into real economic gains for his supporters,” he adds.
The most important issues for “very conservative” voters are inflation, immigration, and jobs and the economy, according to a Cato Institute survey from before last year’s election.
The president has only really made progress on immigration. But as I outlined in the June 22 edition of this newsletter, his efforts there risk adding to inflation and weakening economic growth.
Trump believes that his “big beautiful” bill and tariffs will appease his base. But even if Republican voters are willing to endure economic disruption, Trump will face an uphill battle to keep them onside in the coming months.
He may lean more into pressuring the US Federal Reserve to cut interest rates, or try to ignite more growth through deregulation. The most effective tool, however, will probably be easing up on his tariff plans (or even removing some of the painful provisions in his “big beautiful” bill). There is limited fiscal room for much else.
Right now, his voters are hopeful. But increasingly, the president’s fingerprints will be over the economy — and it will be harder to pin the blame on someone else.
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Food for thought
Does art reflect the economy? This paper analyses 630,000 paintings from 1400 onward to uncover how visual art mirrors its socio-economic context.
Free Lunch on Sunday is edited by Harvey Nriapia
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