A landslide victory for Democrats in the midterm elections could lead to changes in economic policy related to trade, spending priorities, and artificial intelligence. However, the greatest force shaping the economy does not change just because the political party in power changes.
Economists say growth dependent on affordability pressures, heavy government spending and tailwinds from artificial intelligence is likely to continue. And all of those factors pose risks to the economy.
“The economy is in some ways very fragile. We don’t know how long it will take to get the economy off track. The risk of a recession is much greater,” said Mark Zandi, chief economist at Moody’s Analytics. “Not at the moment, but I don’t think it’s gone away.”
Zandi said he was concerned before the election and is still concerned that the economy is under threat from inflation, an overwhelming labor market and geopolitical dangers.
Democrats scrambled to overturn victories in House and Senate races, as well as gubernatorial and other state races. But economic and foreign policy is primarily decided by the executive branch, and while President Donald Trump remains far removed from his Democratic opponents, he said Wednesday that he looks forward to working with them.
“I don’t expect any changes in economic policy. The Iran war, tariff and trade policies, coercive immigration policies are all based on executive orders. They are not driven by law,” Zandi said.
“The president thought it was good policy before the election. I don’t know why he would change his mind after the election,” he added. “Thus, these policies will continue to be policies that suppress growth and increase inflationary pressures and interest rates.”
Zandi sees the ramp-up of AI hyperscalers as both a key to economic growth and a source of potential danger.
“Growth is highly dependent on AI, the growth effect of AI is highly dependent on the stock market, and the stock market is highly dependent on valuation, so the risks are clearly to the downside,” he said. “It feels like a very vulnerable place and the labor market is not working well.”
Local opposition to data centers is a significant election issue, according to a CNBC poll, and for Democrats in particular, the issue ranks lower than the cost of living and corruption, but could pose an additional economic headwind.
two economies
The election was held amid polarized economic views.
Top-line numbers such as gross domestic product, consumer spending, and the unemployment rate tell us that the economy is thriving while consumers are spending and most Americans who want jobs are working. GDP accelerated at an annualized pace of 3.4% in the third quarter, with consumer spending increasing by 3.8%. The unemployment rate is 4.2%, with layoffs near the lowest level since 1969.
But rising prices have overshadowed otherwise solid metrics.
Inflation, as measured by the Consumer Price Index, was 3.7% in September, significantly up from 2.3% in April 2025, when President Trump announced the aggressive implementation of so-called reciprocal tariffs on US trading partners. A war with Iran will only make this situation worse. When the US and Israel launched their attacks on Iran in late February, the CPI was just 2.4%. This war caused a rise in gasoline prices.
And wages have not kept pace with rising costs. According to the U.S. Bureau of Labor Statistics, the inflation-adjusted wage growth rate turned negative in September, down 0.7% from a year earlier.
One area where both sides of the political divide may agree is on tariffs.
Congressional Democrats do not reflexively oppose tariff efforts aimed at leveling the playing field. But President Trump’s tariffs have been criticized for their far-reaching nature.
Gary Cohn, who chaired the National Economic Council during Trump’s first term, said Wednesday he believes there is room for movement on trade issues.
“We now have a more universal view of tariffs and what they serve,” Cohn said in an interview with CNBC. “Protecting American workers, protecting American manufacturing, protecting American jobs from the United States, especially China, is better than anything else and has always been good policy.”
“Closing the borders between Canada, Mexico, and the United States probably isn’t a very good policy,” Cohn said, but he thinks there could be a “middle ground” where the tariffs actually go through the legislative system and become law. They’re not an executive order that the next president can rescind the moment he steps off the podium.
Addressing affordability
Democrats are also likely to consider scaling back spending cuts to SNAP food stamp benefits and Medicaid that the Republican-controlled Congress approved under “One Big Beautiful Bill,” Morgan Stanley analysts said in a client note. But other policies opposed by Democrats will be difficult to reverse.
“We believe that the policy uncertainty since the beginning of President Trump’s second term is tied to executive action rather than legislative action,” the company said. “Policies related to tariffs, geopolitics, trade, … deregulation, export controls, etc. are all likely to remain, and we should expect some level of policy uncertainty to continue.”
High levels of government debt and fiscal deficits are likely to continue.
The national debt currently stands at $40.5 trillion, an increase of more than $4 trillion since President Trump took office in January 2025. Net interest on the debt in fiscal year 2026 totals $1.05 trillion, more than spending on any other category except Social Security and Medicare.
The United States ended the year with a deficit of just under $2 trillion, or about 6.1% of GDP. Morgan Stanley expects that level to continue despite some Democratic officials preaching fiscal discipline.
House Majority Leader Hakeem Jeffries (D.N.Y.) speaks at an election night watch party in Washington, D.C., on November 3, 2026, after the Democratic Party won the House of Representatives.
Tom Williams | CQ-Roll Call Inc. | Getty Images
Goldman Sachs chief economist Jan Hatzius said in a note that while there are concerns that a change in government could lead to a standoff over the debt ceiling, “Democrats are likely to use the (stalemate) to win policy concessions.”
“It’s not yet clear what Democrats will seek in return, but limiting war with Iran, repealing tariffs, reversing spending cuts and expanding health care benefits appear to be high on the list of priorities,” he said.
Despite the headwinds and political uncertainty, most on Wall Street expect economic growth to continue, barring any problems or lingering questions over the cost of living.
“My sense is that we will continue to see an economic expansion characterized by above-trend growth near 2%,” said Joseph Brusuelas, chief economist at RSM.
Bruelas also sees it as an opportunity to “reset” the trade deal between the U.S., Mexico and Canada after a year and a half of tension due to Trump’s tariffs and retaliation.
“There is only a 15% chance that the economy will go into recession over the next 12 months,” he said. “The outcome of the election was not material to that estimate.”
