What’s at stake for retailers in this year’s election?

While it doesn’t seem a moment has passed since the last one, a presidential election year has rolled around again. This year will almost certainly be a rematch of the 2020 election, with President Joe Biden and former President Donald Trump butting heads as they try to convince the American people of their merits.

Much will be penned on the politics of the election, but not so much will be written about its potential impact on retail. However, as retail is one of the biggest parts of the economy and the nation’s largest private-sector employer, it is probably wise to at least consider some of the implications.

The election affects retail in two main ways. There is the election itself and what this does to consumer confidence and habits. Then there is the aftermath of the election when, depending on the outcome, the
policies of a new or incumbent administration take root.

The election itself has some impact but it is nowhere near as important as the policies that come in after the elected administration takes office in January. Naturally, when there is a change, the shifts are more radical than if an incumbent administration is retained.

But let’s start with the election itself. From past cycles, it is evident that most people take the election in their stride and the impact on consumer spending or habits should not be overestimated. However, there
are some interesting historical trends. And while this cycle has the potential to be a more bitterly fought election than many in recent history, I believe they are still relevant.

How previous election seasons have affected the retail market

When looking at all the elections from 1940 to today, retail sales have shown 0.8 per cent higher growth in election years than in non-election years. This isn’t necessarily linked to the politics of elections; it could be driven by economic cycles and policies preceding elections, such as tax cuts, which are designed to make consumers feel better. There might also be some psychology at play, with consumers feeling more excited or throwing caution to the wind as everything feels disrupted and changeable.

Whether this pattern holds true for the 2024 election remains to be seen. The initial evidence from the first quarter suggests it probably won’t. Retail sales growth held up relatively well in the first three months of the year, but growth rates are running below the long-term average, and once the impact of an earlier Easter and an extra day of trade from the leap year has been accounted for, growth appears to be slowing down slightly.

To be fair, the established pattern of the numbers has been disrupted a lot because of the pandemic but, even so, this election cycle is one that is characterised by a lot of consumer uncertainty and some negative sentiment about an economy that, in reality, has held up quite well but which has some deep-rooted issues such as high inflation. This means it will be a bit more subdued for retail.

Another interesting trend from the data is that during an election year, retail sales growth rates tend to slow a bit after the first quarter. In the middle part of the year, they end up trending around 0.8 percentage points below the first three months. Again, it is hard to tie this directly to an election, but it is certainly the case that consumers get more distracted, and some get more nervous about the election as it approaches.

The good news is that in every election cycle, sales growth rebounds once the election is over and the important holiday season approaches. Notably, growth is a lot faster in years when there is a change of administration, maybe because consumers are excited for a shift in policies or anticipate better things on the horizon. However, it has to be said that, in the past, a lot of this was driven by elections in which the public wasn’t so closely divided about the candidates. So, again, we will need to see how the numbers play out this time around.

Another interesting factor in the data is the swings in confidence among those affiliated with different parties. Perhaps not unsurprisingly, views on the future of the economy and the willingness to buy big-ticket items are affected by the latest polls. When Republicans are in the lead, Republican voters tend to be more optimistic; when Democrats are in the lead, Democrats tend to be more optimistic. With a very close election, these sentiments tend to cancel each other out but there will probably be a small impact that varies geographically, given the unevenness of voting patterns.

It is also worth noting that elections affect more than just public sentiment. Businesses, too, feel an impact. One often overlooked aspect of this is the impact on retailers who market themselves via social media, which includes a lot of direct-to-consumer brands. As the election approaches, political parties pump huge amounts of money into social media advertising. This increases the price of placements and also negatively impacts conversion rates as people get bombarded with advertising. The impact can be punishing on both costs and sales for retailers. During this period, brands need to become far more creative about how they reach consumers.

What changes for retailers, depending on the outcome

Regardless of who wins, however, the main areas of focus in this cycle are tariffs, competition and regulation, and tax policy.

Starting with tax policy, the big issue here is the Tax Cuts and Jobs Act that then-President Trump signed in 2017. This act is due to expire by the end of 2025. If not renewed, this will cost most Americans 1-4 per cent more in federal taxes a year. If this happens, there will be a negative impact on consumer spending, especially if household finances remain stretched. While it is Congress that will ultimately vote on whether the cuts are renewed, the president will have an important voice. Trump has made his preference for extending the cuts in their entirety very clear. Biden hasn’t been so decisive on the issue, but likely favours maintaining only some cuts for those making under a certain threshold, probably US$400,000 for single filers.

On top of personal taxation, there are the corporate taxes that retailers pay. The division here is clearer, with Trump wanting to maintain the cuts he made, and Biden favouring taking rates up a bit – but not to the level they were at before. Although a web of exemptions will still be available to offset corporate taxes, it is likely retailers’ rates will rise under a Biden administration.

On tariffs, there isn’t as much division as might be expected. Both Biden and Trump have a muscular approach to the issue of imports, especially from China, which is seen as using unfair practices to gain an advantage. Indeed, most of the original Trump tariffs have been maintained by the Biden administration. After the election, a Biden administration would probably take a more dovish approach by not vastly extending tariffs. Trump, on the other hand, will probably double down on his initial policy. While the messaging around tariffs plays well politically, the reality is that, when they’re in place, American businesses and consumers end up paying more for goods. In the case of tariffs, the narrative trumps the practicalities so the prospects in this area for retail, from both political parties, are unfavourable.

A particular area of focus that is already on the radar of Congress is the de minimis rule,* which China
uses on marketplaces like Shein to circumvent duties legally and to avoid customs scrutiny on imports. A group of lawmakers wants to close the loophole. If such legislation passes in the next Congress, it will
land on the president’s desk for a decision. Based on a reading of their policy positions, it is unlikely that
either president would veto it. While closing the loophole would hinder American consumers, it would be
helpful to US retailers, which are increasingly competing with their cheaper Chinese counterparts.

Finally, there is the issue of broader competition policy. Under Biden, the Federal Trade Commission (FTC) has been aggressive in going after American companies, including businesses like Amazon, Kroger and most recently, Tapestry.

If Biden remains in office, this area of policy is unlikely to change. If Trump should be elected, the
FTC will be more inclined to allow mergers. However, that would not mean a free pass for businesses like Amazon because Trump, while more comfortable with corporate power, is not a free marketeer.

Alongside these three main areas of focus, there will be many other changes, including the approach
to inflation, the role of the Federal Reserve, and the approach to trade agreements and economic policy.
Collectively, these things will shape the operating environment for retailers and set the mood music for consumers for at least the next four years. The election matters to everyone, and that includes retail.

This story first appeared in the June 2024 issue of Inside Retail US magazine.

*De minimis refers to a value threshold below which imported goods are exempt from customs duties and/or taxes.

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