The Decisive | Season 7 | Ep.7 - U.S. Midterm Elections: Scenarios, Stakes and Significance

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Kristen Hallam:

You're listening to The Decisive Podcast, insights and analysis to empower confident decision-making. Welcome to The Decisive Podcast. I'm your host, Kristen Hallam, and I have joining me today John Raines, our Head of North America Country Risk at S&P Global Market Intelligence. And we are going to be talking about a pretty hot topic right now, the US midterm elections. John, welcome back to The Decisive Podcast.

 

John Raines:

It's good to be back.

 

Kristen Hallam:

So let's maybe start at a high level and just talk about our approach in general to how we analyze upcoming elections. So, John, how would you describe our approach to that analysis?

 

John Raines:

That is a great question. And honestly, it's a question I wish people ask me more because I think the natural default when we get asked about elections is who's going to win. It makes sense, right? Because obviously the implications are decided by the winners and not the losers. And so therefore, let's cut to the chase. Who's going to win? Tell me what's going to happen. But the problem is that we live in an environment now where not only are we polarized, But also just to get people on the phone to conduct polls, exceedingly difficult. 5%, sometimes less. And so because of that, what you've got to do is not only focus in on who potentially is going to win, but also more importantly, drawing out scenarios and implications so the clients know what's coming down around the corner depending on what scenario is likely to unfold.

 

John Raines:

So it's a little bit of a process. You want to create the scenarios, look at the implications, And then see where it affects clients as well.

 

Kristen Hallam:

I'd like to just remind our listeners, particularly our listeners outside of the US, we have a significant number of subscribers outside the US, of why the midterm elections in the US are important. Like, why do we care so much about the outcome of these elections? It's not a presidential election. So what's the significance here, John?

 

John Raines:

Yeah, the big thing that we're all looking at, the big significance here is that this election is going to determine who controls Congress in the last 2 years of the Trump presidency. So typically what we see about these midterm elections is they are a referendum on the president themselves, right? And generally speaking, those referendums are quite negative. In fact, over the last 80 years, We've only had 2 times where the president's party has actually gained seats in the House of Representatives. That was 1998 after the Clinton impeachment and in 2002 after September 11th. And so what ends up happening is the results of these midterm elections are largely going to determine what happens with the legislative agenda of Donald Trump going forward. Now, Donald Trump hasn't really rolled through legislative statutes. He's done a lot of things through executive orders, but it does give you a sense where things are likely to go and the battles that are likely to erupt on the federal scenes if Democrats are able to attain a majority in the House of Representatives and also the Senate. And then on the state level and on a local level, we have 36 governorships that are up.

 

John Raines:

So they generally fall within these midterm bands. And again, that's going to have a significant influence when we're looking at state policy going forward. localities. And now, because we have this inter-decade redistricting, they're going to decide where the congressional and the state legislative lines are going to be drawn really every 2 years as we're going forward until we come up with a new system in order to delineate those.

 

Kristen Hallam:

Sounding like there's a lot at stake with these elections, especially as you mentioned with the governorships. That was something that was not top of my mind, but so it's good to be reminded about that. So, John, what would you say are the, the key issues in these elections? Is it just purely a referendum on President Trump and his policies, or are there other issues that are in play here?

 

John Raines:

Every single presidency, we pretty much see this. So on one side, it is a referendum, but there's always a reflection of the issues of the day. And the issue of the day, just like we saw in 2022 and really more importantly, 2024 in the presidential race. Cost of living. Looking at fuel prices approaching $5 a gallon, diesel $6 a gallon, that is playing not only on the news, but it's really playing in front of people's eyes as they're driving down the street. And it's something that's really weighing down the presidential numbers. And then also the gain in the Democrats in the generic ballot. So that's when we have polling where there's a Unnamed Democrat, unnamed Republican.

 

John Raines:

Right now, Democrats are leading about 8.5% nationally, and that's up about 3 points from where we were at the beginning of the year. So it's been pretty fundamental. But aside from cost of living, and really something that's associated with that though, are 2 subsidiary issues. Number one, the war in Ukraine, which started off unpopular and has continued to do so as things have drawn on. We are now 8 months in. And then The third is the tariffs. So I think that in the beginning, I think there was a general perception amongst the public that these tariffs could be implemented in a way that would bring US manufacturing back. Perhaps that is going to happen, perhaps it's not.

 

John Raines:

But one thing that's been associated with them, at least in some communities, especially we're thinking upper Midwest and border communities, is that they have had some type of impact on prices. Now, you could debate that. I'm not an economist, But the perception amongst this community is that's the case. Now, we do have some side issues that are also important that I think are going to likely gain importance not only in 2026, but also looking ahead towards 2028. One of those, AI data centers. And what's been interesting is that both Republicans and Democrats have been switching their policy really over the course of a few months. Last year, we had countless Democrats and again, Republicans saying, oh, data centers, best things in the world. AI full speed ahead.

 

John Raines:

And then what we're hearing this year is state after state politician coming out and saying, whoa, whoa, whoa, our state wants a moratorium. No, these data centers need to bear for the, the costs associated with them, whether that's energy cost, water cost. So there's been a huge reversal there. And it'll be interesting to see how these parties prepare themselves as they get past the '26 election and headed towards '28. Right now, One poll said that data centers, only about 1% of the public thinks that is their highest, most important issue. Does that change as we go to 2028?

 

Kristen Hallam:

I think that's really quite a list there, a lot at play. And it's interesting that you mentioned some issues that maybe aren't at the forefront right now in 2026, but could be in just a couple of years. And AI and data centers is an interesting one. I'm sitting in Virginia. Virginia is one of the— has, I think, some of the highest density in terms of data centers in the whole world. So it's an issue here for sure, and definitely one that I can see growing in importance in the next election cycle. And just a quick plug, we will be having an episode of The Decisive on AI and data centers next week. next month in October.

 

Kristen Hallam:

So now that we know what the— some of the key issues are, John, what would you say are the key battleground states?

 

John Raines:

Obviously, we have those governorship races, which are going to be important, again, looking at state policy and redistricting. But it's really those Senate races that we are focused on, right? And so where we're looking is a manner of speaking of where the Democrats are competitive, where the Republicans Have an advantage. And the way I like to break it down is that we've seen a shift. So early on, I think the expectation, even if you were to ask me a year ago, I would tell you that the odds that the Democrats take the Senate is probably 30%, maybe 40%. And the reason for that is it's really a pretty structurally, at least, a very pro-Republican map. Of all of the seats that are up, there's 23 Republicans that are currently up, there's only one state where Democrats actually won that state in 2024 in the presidential cycle, and that's Maine with Susan Collins, who's a very formidable candidate. All of the others went with Republicans, and most of these are double-digit leads by the Republicans. And so therefore, it seemed like it was going to be very difficult for the Democrats to be able to pick up these seats if they needed.

 

John Raines:

They need 4 because right now it's a 53-47 Republican majority, which means they need to get those 3 seats and then it's a 50-50 tie. Vice president breaks the tie. So you need that 4th seat. And the question is, where are you going to get? So the ones where we're looking at now are North Carolina, where it looks as though the Democrat there is up by about 8 points. I think most likely that's not going to be too difficult for the Democrats. But then after that, it starts to get a bit tougher sledding. The first of those, again, as I mentioned, Maine. Very pro-Democratic environment.

 

John Raines:

Again, 8.5 points in the generic ballot. One would think that with Maine, which also voted for Kamala Harris, they have a pretty good chance of upsetting Susan Collins there, despite the fact that she has won repeatedly in a difficult swing state. The other states that we're looking at include Democrat holds where they're going to have to defend themselves. That includes New Hampshire, where Congressman Chris Pappas is going for an open seat. versus John Sununu, who's also a former senator. Brother was a governor there. Again, very strong competition there. Good chance for the Republicans to have a pickup.

 

John Raines:

Also Michigan, important race there. Abdul El-Sayed facing off against former Congressman Mike Rogers. El-Sayed, very progressive on his ideological positions. Really important race there. If he were to lose or to underperform and barely win, that could be utilized against progressive Democrats as we head into the 2028 election. Saying it's difficult for progressives to win in these swing state environments, or perhaps even more difficult to run nationally. Finally, Democrats are going to need to hold Minnesota, which hasn't really voted on the presidential side towards a Republican since 1972. That's your tier 1, right? So they got to win most or all of those.

 

John Raines:

And there's tier 2. Now with these tier 2 states, they have got to pull off 2 more victories. And again, these are states where Donald Trump won by at least 11 points, 13 points, or even more. Those include Texas with Ted Lieu running against Attorney General Ken Paxton. Right now, most polls have Ted Lieu in the lead. But traditionally, Texas has voted Republican statewide repeatedly with virtually all of their statewide races going Republican in recent cycles. Second would be Alaska. Mary Peltola, former congressman there running against incumbent Senator Dan Sullivan.

 

John Raines:

Very close race. And again, Alaska. has been voting Republican for quite some time. An open seat in Iowa that could be affected by various trade policy, of course, higher diesel prices in more rural areas. And finally, Ohio, where former Senator Sherrod Brown is currently running against the appointed senator there. Again, tariffs could be a factor in pushing him over the top, and he obviously has won statewide. After that, it gets really slim pickings. We're talking states like Kansas, Nebraska, Montana, states that Donald Trump won by 15 percentage points, 20 percentage points or more.

 

John Raines:

So we're talking it would not have to be necessarily a blue wave. We're talking a blue tsunami. We're talking Category 5 hurricane gale-force winds to push the Democrats over the top there. But polls suggest that these could be actually closer than expected, especially again looking at tariff policy and also again higher diesel prices. It should be noted that the Democrats in many states are not even running as Democrats due to the brand name not being popular at all in these more red-leaning states. You're having to have independents there who will ultimately end up caucusing with the Democrats if they were to win. I would say unlikely at this point that those folks win, but obviously we have seen situations like this before, like 2006, where states that we thought would be noncompetitive actually switched towards the Democrats. In that particular cycle.

 

Kristen Hallam:

Wow. So, John, with all of that in mind, with the various Senate races, which are going to be pretty exciting to watch, what are the main scenarios that you see for the outcome of the midterms?

 

John Raines:

We don't actually do election forecasts here, but we can at least map them out when we're looking at polls and we look at historic tendencies. And so I think the House, it's going to be difficult for the Republicans to retain control. Remember, Democrats only need to pick up 3 seats in the House in order to get a majority. But there are some structural things that favor the Republicans. Number one is they've done well with redistricting. Partly it's been with Republican legislatures at the urging of the White House. And then secondly, that has been done by a Supreme Court ruling looking at the 1965 Voting Rights Act, which is largely, not entirely, but largely eliminated many of the majority-minority districts. Which have favored Democrats in the past.

 

John Raines:

Overall, it looks as though Republicans have picked up anywhere between 6 to 9 seats, 10 seats, just by way of redistricting. Now, whether they actually win those or not is debatable in this particular political environment, but that was the intention. Now, Democrats have tried to do that as well, but they have not been as effective for various reasons— state rules, timing, etc. But what it means is that We do have an advantage for the Republicans as far as the way the seats are drawn and due to the fact that Americans have tended to cluster themselves. So a lot of Democrats are clustered in cities where you have lots of Republicans in suburbs and exurbs. And it means that it's kind of hard to draw these maps in ways that can really represent an entire state's population. So there, that way favors Republicans a little bit as well. Overall, what that means end of the day is Democrats need to win The popular vote in the House by about 4 to 5 percentage points in order to get a majority.

 

John Raines:

They're going to need that to happen right now. Like I said before, they have a lead in the generic ballot by about 8.5 percentage points. So you would think they're likely to surpass that. However, if the polls are wrong, then we can see the Republicans potentially get an advantage here. But there are some issues that say the Republicans could have a fighting chance, including that they have outraised the Democrats, especially at the national party level and at the super PAC level by hundreds of millions of dollars. And we're starting to see those ads come to the airwaves now. So with the supposition, scenario one, probably Democrats get the House. That's going to be in scenario one and scenario two.

 

John Raines:

As far as the Senate goes right now, the polls suggest the Democrats have a fighting chance of winning the Senate. So That's probably scenario one is that the Democrats sweep. It's going to be very close. And again, if the polls are wrong, then they could be very wrong and Republicans do well in the Senate. But right now I'd say number one, Democrats sweep. Number 2, Democrats get the House, but Republicans retain the Senate. And then if all of the things befall the Democrats, as I mentioned before, we could see, and I don't think it's a non-negligible chance here, I would say probably in the order of about 20 or 30% chance. Republicans end up retaining their majorities in both legislative chambers.

 

Kristen Hallam:

Okay. Now, getting back to what we were talking about earlier, given that the polls are not— what's the word I'm looking for— robust, maybe, in, in terms of who is participating, it sounds like we could be in for some surprises on Election Day. It's possible.

 

John Raines:

And not only that, but we're seeing a lot this time are partisan polls, especially in these kind of like when I was talking before about these tier 3 states, we're not seeing a lot of polls conducted by Our regular nationally known pollsters. What we're seeing are polls that have been conducted by the campaign themselves or supported by the campaign or funded by the campaign. And then suddenly these are polls that suddenly suggest that the Democrat is highly competitive here. Is that true? We don't know. Right. It's— one could argue that there's a partisan lean there. And if these polls suddenly had said that Republicans were winning that state by 10 to 15 points, I highly doubt that a Democratic candidate or a Democratic-sponsored poll is suddenly going to be published relaying that type of information. So it does make things a little bit difficult to see.

 

Kristen Hallam:

And once we have the outcome, once we know who's running Congress and who's running the states, who the governors will be, what policies do you think will be most impacted under these different scenarios, especially since at the federal level, you mentioned that President Trump has focused more on executive orders versus legislation to achieve his goals.

 

John Raines:

It's a good point, right? So I think as much as I at the beginning of this podcast had emphasized these midterm elections are critically important, they're going to change the U.S. history as we go forward, we need to recognize this is a president who does not necessarily drive his view of himself vis-à-vis who controls Congress or what legislation could get passed. So I think that needs to be understood, that when we're talking about issues of overall regulation, or we're talking about where is trade policy likely to head, or are we going to start seeing a real shift here when it comes to foreign policy, the answer is no. This is an executive-led government, and it's going to continue to be so for the next 2 years. That being said, these outcomes do make a difference. And to look at one, I think, which is probably most interesting, is what that say that the Republicans do retain their majorities. This has got to propel this presidency to believe as though that they're a lot stronger than the media narrative currently is suggesting. They're much stronger than what polls are currently indicating.

 

John Raines:

And I think in some ways it would allow them to take this as a victory lap. And I think you'd see that in several policies. I would think that you would see another bite at the apple when it comes to tax cuts, tax credits, especially when it comes to US manufacturing. I think that would come down the pike. Other things I think you would see is the continued cutting of social programs in various facets where they could, especially in ways where they feel like it might hurt— not hurt them as much as we get closer to 2028. I think efforts to alleviate permitting reform when it comes to mining, And oil and energy. I think those are on the table. Of course, many of these you might have to reach out to Democrats because remember, you still— none of these parties are going to achieve a filibuster-proof 60 votes inside the Senate.

 

John Raines:

So if they don't affect the budget and you don't go through budget reconciliation, which only needs a basic majority, you're going to have to do these with bipartisan support. So everything that I'm talking here that's not related to the budget, that's part and parcel of what you're going to have to do. But regardless, I think efforts at deregulation, Efforts at permitting, efforts at immigration enforcement. I think those are all on the table, right? Along with additional funding for the Defense Department, as well as supplemental funding for the Iraq War are likely to come down the pike. It's going to be a far much more smooth sailing process for the administration if he can attain these majorities. In some ways, that's part of the reason we're starting to see that he is starting, the president here, getting far more galvanized and far more involved inside the election process that we hadn't seen in these months prior. What happens if the Democrats win? Right? Which is probably the number one thing that clients are asking me on a regular basis. And the big thing I think we need to recognize is that there's a couple of things.

 

John Raines:

Number one is legislative gridlock. All the things I mentioned before, talk about bipartisanship, they're going to have to be done on steroids because nothing is getting passed. Unless a Democratic House or Democratic Senate is willing to put their stamp of approval. And that means concessions from a president who's not necessarily been known for offering concessions in the past. Secondarily, it means that we're likely to see all types of policies getting passed by these Democrats inside the House or in the Senate, and they're likely to do so with the understanding being these things are going to get vetoed by the president. And they are not going to have the votes to override his veto. And what that means is that they're going to be less important as far as actual legislation, and they're going to be far more important as far as setting the policy as we go forward. And for these presidential candidates, remember, the presidential race is going to start the day after the midterm elections.

 

John Raines:

What policies are these presidential candidates going to be espousing? A lot of them are going to be defined from what's coming out of Congress. Another implication, possibility of a shutdown. We've had 2 long shutdowns that have occurred during the Trump administrations over the last few years. The odds of that happening again, pretty high, especially when we're talking about, again, funding for Medicaid, Iraq War funding, immigration enforcement, you name it. There are going to be large ideological divides between Congress and the presidents there, and some of these could be borne out When we look at funding fights that end up causing either a partial or full government shutdown, especially as we come to the year-end funding, September 30th, around that time, odds are high that you could have some type of fiscal impasse. The last thing is that, and I think this is probably what we're going to see quite a bit of, is lots and lots of investigations. So investigations of what the Trump administration has done trade-wise, what has it done with government contracts, what has it done with energy policy, what has it done with whatever, you're going to see congressional committees really across the board taking this as an opportunity to subpoena the White House, subpoena government agencies, subpoena corporate executives to say, what's going on here? How did this happen? Why were we not informed? And I think for the White House, I think they're likely to come back and say, listen, this is none of your business, or they're going to fight these subpoenas. But I think for corporate America, it's going to be more difficult for them to do that.

 

John Raines:

And they're going to have to weigh Do they want to understand where the White House is coming from and saying, hey, listen, this is not an area where we feel like we can appease Congress? Or is the situation where they're looking ahead saying, I think we need to meet these demands, and they're going to find themselves in an area where they're either having to offer testimony, provide documentation, which can make these folks feel quite uncomfortable? Now, just because they're going to be very combative between one another, it doesn't mean necessarily that we have no opportunity for legislation. We do have certain areas where I think you could see things on healthcare and pricing for drugs. I also think AI data centers, we already had legislation that was close to fruition. I could see that coming again along the path, along with other things involving infrastructure too. So there are pathways here, but I think it's going to be far more competitive than it is going to be conciliatory as we work our way forward here.

 

Kristen Hallam:

All right. It sounds like either way, you're going to have your work cut out for you, John. You're going to be pretty busy. So given everything that we've talked about, John, do we think there's a chance that there will be a contested election?

 

John Raines:

Right now, that is not our baseline view. Our baseline view is these things are likely to go on schedule and we're not going to see too much disruption. Obviously, when it comes to California, The way they count ballots, it could be in contention there for a couple days, a couple weeks. But regardless of that, what we're likely to see is that things are going to be going in order. So we'll have the counting of the ballots, folks will be seated, and we really shouldn't have much of a problem. That being said, obviously we've had certain disagreements associated with this election, so including whether mail ballots are getting counted, how they get counted, the process there. Those have gone to the Supreme Court, and Supreme Court has pretty much come down and said, listen, it's a little too late for us to be able to change the rules currently. Might have an impact as we go to 2028, but at this point we're seeing this being your typical election.

 

John Raines:

Obviously, if things did not go down that way and we start to have a situation whereby it is a contested election where people are taking this to court, we could see potential protests that are associated with that. Some of those could get a bit violent, especially if we're talking about whether A majority's in question here. But again, baseline view is that things— this looks like your typical midterm election, and we're not going to deviate from that quite yet.

 

Kristen Hallam:

I'm sure we could keep talking about this for much, much longer, but the time has come to wrap up. What— and we've covered a lot— what would you say are maybe the, the top takeaways for our listeners today on the US midterms?

 

John Raines:

I think the big message here is a few items. Number one is the Democrats look pretty well-poised to have some pretty significant gains as we go forward, just looking at where the polls are and president's popularity. But we don't want to overestimate the impact here. It certainly is going to change the dynamics of the political environment in Washington, but it doesn't necessarily change the power structure. Within the White House or how the White House is likely to view Democrats or how they're likely to govern policy. Well, I think the big takeaway beyond that is that this is going to be a reflection probably not only within the US public, but also within the world, that if the Democrats can win here, that there is a viable opposition. And I think in some ways it's going to make people take a second step saying, where do I put my chips here? With the administration, or do I want to put more of my chips with Congress, or do I want to parry it down the middle? And I think you're going to start to see a lot more corporate bodies and a lot more entities out there saying, I want to go a little bit more towards the center here because I really don't know what's going to happen next. So from that, we'll just find out together as we start to see these 2024 primaries start to kick off at the end of next year or the beginning of 2028.

 

Kristen Hallam:

All right. Thank you so much, John, for taking the time to chat with me about the US midterms. I know you're super busy and will be for, as we've discussed, the foreseeable future. And we will leave it there. Thank you for listening to The Decisive Podcast from S&P Global. Please subscribe and join us for next week's episode. Until then, stay curious and stay informed.

Kristen Hallam:

You're listening to The Decisive Podcast, insights and analysis to empower confident decision-making.

 

Paul Smith:

Hello, and a warm welcome to the latest episode of The Decisive Podcast. I'm Paul Smith, an economist with S&P Global Market Intelligence, and I'm here today to discuss some of the latest trends in our Purchasing Managers' Indices. To help me do that, I'm joined by 2 fellow economists on our team. First up, we have our usual guest, Andrew Harker.

 

Andrew Harker:

Hi, Paul. Nice to be back after the summer break. I'm not missing my holiday at all, honest. Now, I think it'd be good today to catch up on what information our surveys can provide on the Middle East region, and also highlight our construction PMI surveys.

 

Paul Smith:

Thank you, Andrew. Yep, summer holidays do seem a little bit of a distant memory, don't they, at the moment? But yeah, we're looking forward to getting into some of those topics. And also joining us today, first time in a couple of years, we have Tim Moore.

 

Tim Moore:

Hi, Paul. Hi, Andrew. Thanks for having me. Great to join you. Yeah, it's exactly 2 years actually since I was last here. We were talking about geopolitical uncertainty and a new UK Prime Minister. So much of the same. But yeah, looking forward to talking about the global economy more broadly today and some of the Middle Eastern surveys, in particular in Saudi.

 

Paul Smith:

Lots has changed, but not much has changed by the sounds of it there. I think before we get onto some of those topics, I think maybe it's a good idea, and I think we've been doing this in our recent PMI-based podcasts, is maybe a little bit of a scene set and think of where we are in terms of the global business cycle at the moment. And I think the broad theme of this year so far has been, at least on the surface anyway, has been one of maybe surprising resilience, a time of continued headwinds for the global economy. We've had the crisis in the Middle East, trade conflicts, the rapid expansion of CapEx related to artificial intelligence. They've all had disruptive effects on supply chains, prices, and economic activity. And I think as we record this podcast in mid-September, concerns remain, right? Oil once again trading north of $100 a barrel. There's growing continued worries about food prices in the months ahead following an exceptionally hot and dry summer across the Northern Hemisphere. And we've got lots of expectations now of a potential super El Niño event, which is likely to add further pressure on agricultural production around the globe.

And at the same time, definitely in recent weeks, we've seen bond markets become very unsettled by concerns over inflation, geopolitics, fiscal sustainability. And we've got sovereign yields in a number of countries now trading at multi-decade highs. And yet, despite all of these challenges, economic growth has held up remarkably well. Our JPMorgan Global Composite PMI in August rose to a 27-month high at 53.5, that was up from 52.7 in July. Remember, in the PMI world, anything above 50 is seen as growth. The further from 50 we are, the stronger that rate of growth.

And then if we look within that headline number at the country level, growth, strongest level in more than 4 years in the US. Eurozone recording some of its best readings in the past 3 years. Japan, very resilient. China growing more strongly than recently and at a trend rate. Basically, wherever we look, I seem to be finding surprisingly positive economic growth outcomes.

 

Tim Moore:

Yeah, that's right, Paul. You can see, as you say, 53.5, that's a really positive number on the global composite PMI. That's the economy moving up a gear, but we can still see businesses having one foot firmly on the brake. With that PMI data accelerating, we're looking at around about 3% annual GDP growth on a worldwide basis. And then, yeah, taking a look by sector too, things are a little bit uneven. We can see the PMI survey showing manufacturing still expanding solidly. That's supported by tech hardware, machinery demand, data center rollouts. And let's not forget, safety stock-building has meant a boost from inventories too across the summer.

But I think the big gain at the moment, if you look at momentum, that's coming from services. Service sector growth has accelerated for a 5th successive month. That's the highest reading since December 2024, so nearly 2 years ago now. We're looking at financial services and tech being the best performers. There's also a revival in spending on consumer services. Why are these sectors flourishing? Some of it is AI investment spending and CapEx, but we're also seeing private sector employment starting to stabilize a little, and that's helping fortify consumer spending in some areas. Let's not forget too, these sectors are also benefiting from accommodative financial conditions and lower business uncertainty relative to the second quarter. However, output expectations are still really unusually weak for an economy growing at this speed.

It's about the biggest gap between confidence and output, so output running stronger than confidence by the greatest extent since about 2019. And that was also a period of geopolitical uncertainty too. The levels of confidence we're looking at are normally consistent with a flat economy and not a solidly growing one and an accelerating one. So yeah, if you look at the worries conveyed to us from the PMI survey respondents, the most prominent are rising inflation and supply chain disruptions, both of which of course link to the Middle East conflict. And also playing into that lackluster confidence is the prospect of tighter financial conditions in major developed markets. So those headline numbers, the really strong headline growth numbers, are coming with a caveat of relatively weak confidence going forward.

 

Andrew Harker:

Yeah, that's really interesting, Tim. Lots to unpack there, isn't there? I just wanted to jump back to something Paul said at the start of the episode about some of the parts of the world where that resilience has been evident. I think the Middle East falls into that category as well. If you look at the August data, then we've got output growth in economies such as the UAE and Saudi Arabia that's the best since January, February time. So just before the outbreak of war in the region. Similar growth in Kuwait, which had been particularly impacted by the need to close their airspace earlier in the year. So positive news there as well. More widely, sort of business confidence is up in the region.

Tim mentioned some subdued confidence at the global level, but in the Middle East region, confidence is coming back to where it was earlier in the year. And also we're seeing delivery times improve, with companies increasingly reporting actually that they're looking to use local suppliers in order to secure items more quickly. And I just thought it would be good actually to highlight the breadth of our survey coverage in the Middle East region. So we've got a number of surveys there that we run on a monthly basis alongside the economies I've already mentioned. We also cover Qatar and Lebanon, and actually the size of the UAE panel we've got is such that we're able to produce Dubai-specific indices as well. So we've got real good coverage there. In terms of the sectors we monitor, people, I guess, probably more familiar with our standard manufacturing or services PMI surveys. But in the Middle East, we produce what we refer to as non-oil whole economy PMI surveys.

So these cover a wider range of sectors than the standard manufacturing or services PMIs. So we include sectors like construction, wholesale and retail as well. But as you can tell from the name, we don't include the oil sector. And this is because we typically survey private sector companies with our surveys, and the oil sector tends to be dominated by a small number of state-owned enterprises that would be tricky really for us to survey reliably. So we focus our efforts on the rest of the private sector.

 

Tim Moore:

Yeah, it's great to be building out our coverage in the Middle East region. There's a huge appetite for PMI survey data. And yeah, against that backdrop, earlier this year we announced a collaboration between S&P Global and alrajhi capital to produce the alrajhi capital Saudi Construction Index. So the goal with this monthly survey is to provide policymakers and market participants with a reliable tool to monitor changes in business conditions and really better assess the direction of the construction sector. It's the first S&P-developed construction index in the Middle East and covers the largest construction market in the region. Our headline index is a weighted average of 3 subsectors, so that's residential, non-residential structures and infrastructure activity. If you're thinking about what does the non-residential structures index cover, so that's office, commercial, institutional, and industrial. So covering a lot of those large public-private partnerships.

And then associated with that, if you look on the infrastructure side, that's dominated by transportation and energy projects. So the full spectrum of activity in the Saudi construction sector. And when you look at August survey data, you can see a robust upturn in total construction activity. This kind of consolidated a swift recovery in business operations in each month since April's brief downturn. And most importantly, the new order books data showed rapid gains in August, fueled by new residential and infrastructure work. Against this backdrop, input buying, rather, has expanded at the fastest pace since the survey began back in January. So we're looking at a Saudi construction sector that's clearly back on solid ground. Supply chains are also showing a great deal of resilience despite challenges from higher input costs, with delivery times for construction products and materials shortening again in August.

And then looking ahead, we can see from the survey there's upbeat growth projections in all subsectors, particularly housing and infrastructure in the next 3 months. So again, a signal that those large-scale public investment spending is translating into faster growth across the broader construction sector.

 

Andrew Harker:

Yeah, it's great to have that alrajhi capital Construction Index up and running, adding to our construction coverage around the world, because up until now, really, our construction-specific surveys have been primarily European-based. So we have surveys in Germany, France, Italy, and Ireland, enabling us to calculate a Eurozone construction PMI aggregate. Plus, we've also got a survey in the UK. Now, for our construction PMIs, we cover a lot of the standard PMI variables, but as Tim was mentioning there, we've got some specific ones for construction as well. So those breakdowns of activity by different types of construction that Tim was referring to, plus we've got information on subcontractors. And in our Ireland survey, which is sponsored by AIB, we even ask about selling prices. And the data for that actually tracks really nicely against official house price index data. Now, these surveys have been going for a long time now, really. In fact, the UK survey started all the way back in 1997, so it's nearing its 30th birthday.

 

Tim Moore:

Yep, the longest running survey, the UK construction one, and also the largest construction market in Europe. But when you look at the actual PMI data there, I'd describe it as a bit of a look away quick kind of a number. In recent months, we've seen cutbacks to housebuilding, which is aligned with what you've seen in the messaging from volume housebuilders about delayed decision-making and a lack of new project starts, and equally a lack of new infrastructure work to replace completed projects. So aside from some pockets like energy transmission infrastructure, other areas of the civil side have been really quite subdued over the summer. Elsewhere, some signs of stability in August, particularly commercial work. Data centers are a small but important factor, but really what's been trailing behind has been on the residential side. Things have really looked subdued throughout this summer, with the August fall similarly steep to what we'd seen in the first half of the year, with decision-making being put on hold and some nervousness perhaps around the outlook for borrowing costs. As for September and beyond, we're economists here, we're always looking out for green shoots of recovery.

There's plenty on my lawn after all this rain, but I'm not sure we can use that as much of a signal for the housing market outlook, Paul.

 

Paul Smith:

I think that's a fair analogy, Tim. Look, if we take some green shoots as a little bit of a synonym for what we've used today, which is that word resilience, then there are pockets of resilience in the UK housing market at the moment. And I think as most people would recognize, housing markets around the world, and the UK's no exception here, tends to be made up of lots of regional local markets. Markets where activity, prices, are generally determined by local conditions. So if I look at the current data, then places like Northern Ireland, Scotland, areas in Northern England, demand, prices fairly resilient. But look, if I take that bird's eye kind of macro view, then unfortunately I think probably like your lawn, Tim, at the moment there's plenty of bare patches still. And again, probably like in the UK at the moment, they tend to be found in southern England, right? And we had the bulk of that hot weather was concentrated in the south of England, and that's where activity and prices tend to be most subdued in terms of the housing markets at the moment. So look, I'm probably not too surprised when you're referencing there some weakness in UK residential housebuilding overall, because it just fits into that broader narrative, right, at the moment, of a broader slowdown across the housing market in recent months.

And that's several reasons, some of them we've already referenced, right? Geopolitical uncertainty is a major factor, but then we're layering on top of that ongoing worries over domestic taxation, which, look, it seems to be an annual event in the UK at the moment where buyers and sellers around this time of year start to hear speculation and concerns around changes in property tax or capital gains taxes regulation in that end-of-year upcoming government budget that we have in the UK. And then we have borrowing mortgage costs very volatile at the moment. For many buyers, the cost of servicing mortgage debt is of course a lot higher than it was a few years ago, which, look, that is a meaningful constraint on demand and affordability, but also the pricing of their mortgages, they're changing on what feels like a daily basis at the moment. Again, linked to what we've mentioned earlier in the podcast, disruption in kind of sovereign debt markets. So that combination of uncertainty, global, domestic, higher and less predictable borrowing costs, that's crystallizing in other housing indicators that we produce at S&P. For me, that's most notably the Lloyds House Price Index, which recorded its first annual fall in prices since late 2023 in August, although only marginal at 0.4%, and really carrying on a pattern this year where prices have been broadly flat throughout the year to date. They're just moving in a relatively narrow range, not breaking decisively out in either direction.

So that weakness that we're seeing in housebuilding and then kind of prices as well, just part of a wider pattern here. Cautious buyers, higher financing costs, and an uncertain economic and political backdrop, all tending to weigh in those sectors, I think, which are perhaps a little bit more exposed to the types of developments.

 

Andrew Harker:

Yeah, it feels like we've come full circle here over the course of the past 15 or 20 minutes, doesn't it, Paul? Coming back to some of the themes you mentioned at the start of the episode there with that uncertainty about international conditions and what's going to happen with interest rates. You can see how the global picture is still impacting specific economies and sectors in different ways, despite that sort of overall resilience that you were talking about that we've seen globally. So yeah, certainly a lot to look at in the global economy at the moment, and not a straightforward picture by any means.

 

Paul Smith:

No, it is important to look below the surface of those headline numbers. And I think that brings us, as you said, Andrew, brings us all the way back to complete the circle, if you like, on today's kind of topics and maybe a natural place for us to end on today. So a big thank you to you, Andrew, and of course, Tim, for your valuable contributions. Thank you for listening to this episode and please do listen to our other episodes of the Decisive Podcast that are available on our website. And of course, please do follow latest PMI updates on the website and through our usual media channels. Bye for now.

 

Kristin Hallam:

Thank you for listening to The Decisive Podcast from S&P Global. Please subscribe and join us for next week's episode. Until then, stay curious and stay informed.