Major Legislation Unlikely In Tough Year For Democrats

BMI View: US President Barack Obama's low approval ratings lead us to believe that he will have limited success advancing his domestic agenda in 2014, and that Republicans are likely to retain control of the House of Representatives and pick up seats in the Senate in the November midterm election. Indeed, if Republican gains are large enough, they could wrest control of the upper chamber from Democrats, further reducing Obama's ability to affect policy in the final years of his second term.

We see few major changes in the trajectory of US politics in 2014, implying that partisan gridlock is likely to remain the norm. Polling data show President Barack Obama to be quite weak politically after a series of setbacks in 2013, and focus on the November 2014 midterm election will make compromise hard to come by. We expect to see action on must-pass legislation - such as funding the federal government and raising the debt ceiling - but aside from that, we are fairly pessimistic about the potential for major legislative initiatives to find support. The midterm election will be the key political event of the year, and we see the potential for Republicans to retain control of the House of Representatives and take the Senate from Democrats, an outcome that would severely limit Obama's ability to implement his agenda in his final two years.

Obama Mired In Low Approval Ratings

A Low Water Mark
US - Approval & Disapproval Rating Of Pres. Obama, %

Major Legislation Unlikely In Tough Year For Democrats

BMI View: US President Barack Obama's low approval ratings lead us to believe that he will have limited success advancing his domestic agenda in 2014, and that Republicans are likely to retain control of the House of Representatives and pick up seats in the Senate in the November midterm election. Indeed, if Republican gains are large enough, they could wrest control of the upper chamber from Democrats, further reducing Obama's ability to affect policy in the final years of his second term.

We see few major changes in the trajectory of US politics in 2014, implying that partisan gridlock is likely to remain the norm. Polling data show President Barack Obama to be quite weak politically after a series of setbacks in 2013, and focus on the November 2014 midterm election will make compromise hard to come by. We expect to see action on must-pass legislation - such as funding the federal government and raising the debt ceiling - but aside from that, we are fairly pessimistic about the potential for major legislative initiatives to find support. The midterm election will be the key political event of the year, and we see the potential for Republicans to retain control of the House of Representatives and take the Senate from Democrats, an outcome that would severely limit Obama's ability to implement his agenda in his final two years.

Obama Mired In Low Approval Ratings

Obama's approval ratings began falling shortly after his November 2012 re-election and continued to drop over the course of 2013, with current levels of support leading us to believe that he will be limited in pushing his domestic agenda in 2014. Gallup reports that, after hitting a high of 57% in December 2012, Obama's approval rating has fallen to 41% as of January 2013, with his disapproval rating reaching to 53%, matching previous highs. Perhaps more damaging, the president saw the percentage of those who describe him as 'not trustworthy' jump from 30% to 45% over the course of 2013, according to Pew Research. Much of the turn in public opinion against the president is attributable to the failed rollout of his signature health reform measure, the Affordable Care Act, also known as Obamacare ( see 'Health Reform Fiasco Raises Fiscal & Debt Risks', November 21). Additionally, revelations about the NSA accessing American citizens' telecommunications data, the federal government shutdown, and Obama's advocacy for military intervention in Syria likely all weighed on the president, too.

A Low Water Mark
US - Approval & Disapproval Rating Of Pres. Obama, %

The deterioration in public opinion is consistent across party identification, with Democrats, Republicans, and independents all less likely to approve of the job that Obama is doing. We see the erosion of support among Democrats, as a bad sign for Democratic candidates in general, as it will make left-leaning voters less likely to show up on election day. Additionally, it means that Obama has relatively less political capital within his own party with which to push for his priorities in the final three years of his presidency.

Approval Has Fallen Regardless Of Party
US - Approval Rating Of Pres. Obama By Party, %

Midterm Landscape Favours Republicans In House And Senate Races

We believe that that the Republican Party is likely to retain control of the House of Representatives, and that there is a good chance that Republicans will take control of the Senate from Democrats. In the House, Republicans currently enjoy a 232-201 majority, and current polling data suggest that Democrats are unlikely to win the 218 seats necessary to control the chamber. While there was a spike of support for Democrats in generic ballot polling data in October, this lead was quickly reversed as news of the Affordable Care Act's implementation problems spread (the generic ballot asks respondents which party they would support in a hypothetical election).

Health Care Woes Put House Out Of Reach For Democrats
US - "If the election for the U.S. House of Representatives were being held today, would you vote for the Republican candidate or for the Democratic candidate in your district?" %

In the Senate, a combination of factors make it likely that the Republicans will pick up seats, potentially netting the six seats necessary to take the chamber from Democrats, who hold a 55-45 majority, including two independents who caucus with Democrats. First of all, Democrats hold 20 of the 35 seats that are up for election in November, meaning Republicans have a relatively large number of potential targets. Second, the seats of the eight Senators who are retiring after 2014 represent the most vulnerable seats on the ballot this fall, and six out of the eight are held by Democrats, advantaging Republican candidates. Moreover, in seven of those eight states, Obama took a smaller percentage of the vote in 2012 than he did in 2008, suggesting a relatively less favourable environment for Democrats than in 2008, the last time these seats were up for election. Third, historically the party in the White House has fared poorly in midterm elections during a president's second term. If this pattern were to hold, it too would suggest that Republicans are favoured to gain seats in November. That said, this is based on a rather small sample size, as there have only been six such elections since 1950.

Obama A Drag In Key Open-Seat Races
US - Obama State-by-state Margin Of Victory Or Defeat Relative To National Margin Of Victory, %

Having said that, we see three important factors that keep us from concluding at this early stage that Republicans will win enough seats to gain control of the Senate in November. First, the economy accelerated in the second half of 2013, and we forecast stronger real GDP growth and a further decline in the unemployment rate in 2014, which should prove to be a wind at the backs of Democratic candidates. Second, the Republican Party has nominated Senate candidates over the past two election cycles that have been perceived as too conservative on a host of issues, leading to Democratic victories. As such, we acknowledge that there is the potential for Republicans to once again snatch defeat from the jaws of victory, especially if they nominate candidates from the far-right of their party. Third, Senate races differ substantially from House races, and tend to turn less on national issues than on local ones. As a result, it can be much harder to discern national trends in Senate races across the country, especially this far in advance.

Focus On Foreign Policy And Legacy Building

Regardless of the outcome of the November 2014 midterm election, we believe there will be increasing focus from the Obama administration on foreign policy, where it is afforded more latitude to act independent of Congress, and on legacy building. Secretary of State John Kerry is actively pursuing a number of major diplomatic initiatives, including the implementation of the destruction of Syria's chemical weapons stockpile; shifting US diplomatic focus to Asia and finding agreement on the Trans-Pacific Partnership trade deal; and promoting a resolution to the Israeli-Palestinian conflict. Obama is also seeking to wind down the US military presence in Afghanistan, with the goal of all troops being brought home by end-2014. In terms of legacy building, we believe the administration will pay a great deal of attention to implementing the remaining components of the Affordable Care Act, as well as ensuring that the existing components are functioning properly, notably the website exchanges where individuals are meant to be able to buy health insurance.

Risks To Outlook

While we generally consider major legislative action as unlikely in 2014, there is some potential that Republicans and Democrats find common ground on immigration reform or, less likely, long-term fiscal policy. There are legislators on both sides of the aisle that would like to see progress on these issues sooner rather than later. Especially on immigration policy, Republicans could in theory benefit greatly from advocating for reform and gaining the support of Asian-American and Hispanic voters in the US. However, with a midterm election looming, and with the president's approval ratings low, we believe that Republicans will have little incentive to embrace initiatives that are opposed by a large percentage of their base or hand a major policy victory to Obama.

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