Sunday, July 1, 2012

The US economy's impact on the presidential race - the good, the bad and the ugly

It's "the economy, stupid" were the words used by James Carville, Bill Clinton's campaign strategist. The strategy allowed the Clinton campaign to take advantage of the post-Gulf-War recession to defeat George Bush Sr. The question remains whether the current difficult economic conditions will deliver the same outcome for President Obama.

Here are some interesting data compiled by Barclays Capital that looks at previous incumbent presidents running for their second term. In each case the comparison is made between specific economic indicators during a president's tenure and the votes the incumbent was able to win in the general elections. Let's look at the good, the bad, and the ugly of the US economic indicators during the past 4 years and what those indicators were for the previous incumbents.

1. The good: both US inflation gauge and the change in the unemployment rate will work to President's advantage.

Source: Barclays Capital

2. The bad: consumer sentiment (University of Michigan expectations) and the level of unemployment rate puts Mr. Obama with the losing group of incumbents.

3. The ugly: the average GDP growth makes the past period truly stand out.

Clearly this and other indicators are not necessarily the result of who was in the White House in the past four years (though there is some lively debate about that). But what this tells us is that there is a significant relationship between economic conditions and the incumbent's ability to win the second term.  That's why there is a correlation between the equity markets and Obama's odds on Intrade for example. The state of the economy in the next few months will likely decide the next US president.
Barclays Capital: - Weak GDP growth and high unemployment pose significant headwinds to the current incumbent. To overcome them, history suggests that unemployment would need to keep trending down and sentiment would need to strengthen prior to the election.
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