Big Political Shift, Narrow Economic Impact

Arunima Sinha · Morgan Stanley

Remain constructive on AI data-center build-out; midterms shift its geography, not its direction.

AI policy in the US is still evolving, and some projects could slip from 2028 to 2029. The election may slow US capacity additions in some places, but it does not point to a broad reversal of the build-out. The more likely outcome is a conditional cycle in which projects proceed where power, permitting and local politics are supportive, and capacity migrates away from places where approval gets harder. This changes the geography of investment more than the direction of demand.

“There is a risk that some projects could slip from 2028 to [2029], but we remain constructive on the overall build out.”at 1:33

Arunima Sinha · Morgan Stanley

AI build-out supply chain spreads beyond Taiwan and Korea to Mexico, Southeast Asia, Japan, Europe.

Taiwan and Korea remain central to chips and memory, while Mexico is important for server assembly. Southeast Asia is gaining exposure in networking and optical equipment. Japan and Europe are increasingly involved in semiconductor equipment, turbines, transformers and other power infrastructure. The AI investment cycle is therefore spreading across a wider set of countries and product layers.

“Taiwan and Korea remain central to chips and memory, but Mexico is important for server assembly. Southeast Asia is gaining exposure in networking and optical equipment, and Japan and Europe are increasingly involved in semiconductor equipment, turbines, transformers.”at 2:33

Arunima Sinha · Morgan Stanley

Midterms' near-term macro impact is narrow; executive controls tariffs, immigration, regulation.

The Democratic sweep of the federal legislative branch does not change the White House. The president controls tariffs, immigration and much of the regulatory agenda, so the near-term macro impulse is narrower than the political headline. Legislative change, if it comes, would be a marginal adjustment to some domestic spending rather than the key macro policy theme. The election mainly shifts the probability distribution around a limited set of legislative and local policy outcomes.

“Because the president has authority over tariffs, immigration, and much of the regulatory agenda; legislative change, if it comes, might be a marginal adjustment to some domestic spending, but not the key policy theme for macro.”at 0:54

Arunima Sinha · Morgan Stanley

State and local governments matter for AI build-out; anti-data-center Republicans signal permitting risk.

In Texas and Ohio, the executive branch turned over to Democrats while the legislatures did not, so state and local governments matter for AI policy. Some Republicans ran on anti-data-center platforms, which points to local permitting and political risk for AI infrastructure projects.

“For AI, and particularly in Texas and Ohio, where the executive branch turned over to the Democrats but the legislatures did not, state and local governments matter.”at 1:10

Arunima Sinha · Morgan Stanley

A larger US power shortfall could push AI demand to Asia and EMEA.

If the US faces a larger power shortfall, AI-related demand could spill over to Asia and EMEA. This would accelerate a dynamic that Morgan Stanley's equity analysts have already been highlighting, so the spillover is a mechanism tied to US grid constraints.

“At the same time, a larger power shortfall in the U.S. could allow demand to spill over to Asia and EMEA, accelerating a dynamic our equity analysts have already been highlighting.”at 2:53

Arunima Sinha · Morgan Stanley

Reversing SNAP and Medicaid cuts would add under half a point to real spending growth.

A Democratic majority could delay or soften the scheduled SNAP and Medicaid cuts, but the growth effect would be small. Even a full rollback of the measures due to take effect in January 2027 would add less than half a percentage point to real spending growth, so the fiscal channel to the macro outlook is limited.

“Even a full rollback of the measures due to take effect in January 2027 would add less than half a percentage point to real spending growth.”at 3:20

Arunima Sinha · Morgan Stanley

US deficits stay near 6% of GDP even if SNAP/Medicaid cuts reversed; debt more sustainable.

Even with the SNAP and Medicaid cuts fully reversed, deficits are expected to stay around 6% of GDP, so the election does not produce a material change in the deficit. Despite concerns about deficit risks, US debt looks more sustainable on a five-year horizon than it did a year ago, due to upside surprises and nominal growth.

“Even with these SNAP and Medicaid cuts fully reversed, we think deficits stay around 6% of the GDP.”at 3:33