Economic Data to Predict the Election

When looking at most of the literature regarding the effect of economic data on presidential election outcomes, most pundits point to the big three: GDP, unemployment, and gas prices. GDP is a general gauge of the overall health of the economy, unemployment and gas prices are obvious. However, several economists have found higher correlations regarding economic data like the ISM Manufacturing Index and electoral outcomes.

So, comparing some of this year’s data versus last year, we can sort of get an idea of where this election may be headed. I will start with the big items and then look at some other items where high correlations between scores and outcomes have been found. With GDP, in 2011 the GDP growth rate was 2.05. This year, it is projected, based on seven months of reports, to grow at 2.3%. Unlike the Commerce Department, which predicts a worse 1.5% growth rate, I do not look at the fiscal year- which the Commerce Department does, but instead at the calendar year. This would indicate a modest 12% increase over 2011. Past analysis of this metric indicates that a GDP growth rate of around 1.7% seems to be the floor for incumbents to be reelected. At 2.3%, Obama would be safely above that floor.

Last year, the unemployment rate averaged 9.025 compared to 8.258 this year thus far. This is a 8.5% decrease in the unemployment rate year-over-year. However, no incumbent President since Franklin Roosevelt has won reelection with the unemployment over 8% at the time. Most prognosticators believe that the economy will be hard-pressed to break the 8% mark before the election. Should Obama win with unemployment rates this high, then it will certainly be historic. As far as job creation goes, through seven months of 2012, the economy is adding, on average, 170,000 jobs a month compared to 135,000 a year ago- a 25.4% increase. However, this increase in jobs, although certainly better than 2011, is not enough to put a dent in the unemployment rate since it takes about 200,000 jobs a month just to keep pace with new entrants into the job market.

At the end of July, gasoline prices nationwide averaged $3.64 a gallon. Last year, gasoline prices averaged $3.52 a gallon, a slight 3% increase. However, gasoline prices, like the unemployment rate, are huge psychological numbers. Gas prices affect many other items like the price of the transportation of food as well as personal consumption for automobiles.

Although these metrics show improvement over 2011, they can be used to Romney’s advantage. For example, a GDP growth rate of 2% is technically not a recession, but it sure feels like one. Romney has to connect with that feeling and show how he can change that. Likewise, with unemployment, although better than 2011, 8.2% unemployment is unacceptable. Romney needs to focus on that fact and also the quality of the jobs created where many people have taken jobs at pay rates below their former jobs or people are working two jobs to equal what they previously made (sometimes, not even that). Mediocrity is not the American dream. With job creation, Romney needs to emphasize that the economy may be creating jobs, but it is doing that in spite of government spending like the stimulus bill passed in 2009, not because of that spending. Reminding people of the “Recovery Summer” when stimulus funds were supposed to make huge dents in the unemployment rate but failed, is a must. In fact, in that “Recovery Summer,” unemployment averaged in excess of 9%. Finally, with gas prices, Romney needs to illustrate that higher gas prices is the result of Obama’s energy policy. There are enough smoking guns out there where administration officials have suggested that higher gas prices will be the motivation to altering consumer and driving behaviors.

There are other metrics that need to be discussed that could be used as strategic advantages by Romney. In the 2011 calendar year, the federal budget deficit was $1.087 trillion. At the current rate, this year it will be $1.139 trillion, a 4.75% increase in deficit spending. Whereas Obama can point to that 4.75% increase as “arresting” the growth of spending, Romney needs to stress the most important $1 trillion figure. Arresting the rate of deficit spending does NOTHING to reduce the federal debt.

The housing sector was the cause of the last recession. Therefore, its health is of concern here also. Except for existing home sales data, every other metric in this sector shows improvement over 2011. As a result, many have suggested that perhaps the housing market has hit bottom and is now rebounding, as should home prices. However, national averages are little consolation in states where the housing market collapse had its greatest effect- states like Florida and Nevada, two major battleground states this year. Romney needs to stress this in these states that although overall things may be improving nationwide, there are still people hurting in these swing states. Coming out with some free-market based reforms to help homeowners in these states may gain some traction.

Factory orders and durable good orders are generally good indicators of consumer confidence and behaviors regarding the economy. With factory orders, last year they averaged a year-over-year increase of 8.2%. This year, they are projected to increase a mere 3.09% which indicates a retraction in consumer spending. Last year, durable good purchases increased almost 4% over 2010 levels but this year they are basically stagnant showing a 0.1% decline from 2011 levels. This again is indicative of the electorate being suspicious of the economy. As for that all-important ISM Manufacturing Index (which some studies have found to have the highest correlation with incumbent reelection), that figure shows a 4.3% decrease from 2011 levels. Most importantly, in July the index reached its lowest point since 2010, dropping below the 50 point level. To illustrate the importance of this metric, when the index drops from month-to-month, the unemployment rate generally increases in the following month. If this holds true, since the index dropped in July, we may actually see the unemployment rate holding steady at 8.2%, or perhaps even increasing to 8.3-8.4% when the figures are released on Friday.

Being a consumer-based society where spending and consumer attitudes and behavior fuel economic activity, retail sales thus far in 2012 are down about 31% on average (they averaged .375/month increases in 2011 versus .257/month in 2012). That is, sales are up over 2011 levels, but not at the 2011 over 2010 levels which signals a braking of consumer retail purchasing behavior. This stands in contrast to consumer sentiment and confidence levels. This is probably attributable to the fact that these two items are based on survey-type studies where people self-report. For example, consumer sentiment is projected to increase 11.1% over 2011 levels while consumer confidence is projected to increase 18.1% over 2011 levels. However, these “better” numbers are clearly not translating into equal improvements in actual consumer spending and behavior.

In the past 19 months, only in May, 2011 did Obama’s approval ratings exceed 50%. In that time period from January 1, 2011 through 7/31/12, the approval ratings have ranged from a low of 43.3% to a high of 52.1%. In 2011, they averaged 46.1%. Thus far through 7 months of 2012, they average 47.6%. Perhaps this is the most troubling aspect of all this information. Despite the negative figures out there- sluggish GDP growth and job creation, high unemployment, high gas prices and an apparent consumer retraction- Obama’s numbers (nationally) have improved over 2011 levels. Of course, his approval ratings in swing states should be of utmost importance, but are not considered here.

Additionally, an area where Romney can take advantage is in polling regarding the direction of the country. Although not necessarily a reflection of presidential performance, it is an opportunity for Romney. In 2011, an average of almost 70% of respondents said the country was on the wrong track. Through seven months this year, 61.4% still believe the country is headed in the wrong direction. If two-thirds of people say the country is headed in the wrong direction, then this area needs to be exploited. This is where Romney MUST put forth a vision of America- much like Ronald Reagan did in his speech before the convention in 1976- that stands in stark contrast with that of a Barack Obama unrestrained by another campaign for office.

In 1980, Ronald Reagan ran on a vision of America that was the opposite of what Jimmy Carter was feeding us both domestically and in international affairs. Mitt Romney would be well-served to study that 1980 campaign that swept Ronald Reagan into office and made, thankfully, a one-term President of Jimmy Carter. Jimmy Carter’s demise was precipitated by things tangentially under his control- the Arab oil embargo and taking of the Iranian hostages- and many of Obama’s troubles are directly attributable to his policy choices. Carter’s ill-advised energy policy and weak foreign policy led to that embargo and hostages in Iran. Likewise, Obama’s deficit spending, stimulus and crony capitalism has led to stubbornly high unemployment and sluggish GDP growth. Like Carter, who was swept into power in the wake of Vietnam and Watergate, Obama came into power because of the financial collapse and an electorate that was rejecting the presidency of Bush. If Romney can tap into that spirit of Ronald Reagan circa 1979-1980, we can make Barack Obama a one-term President and footnote in history- the first half-black President in American history. Let that, not Obamacare and his flirtation with a European-style socialist state, be his legacy.