Economic signs point both ways for presidential election result

At first glance, it looked as if the elections might be a slam-dunk for Republicans this year, given the way presidents in recent history have fared in the face of poorly performing economies. But as the GOP is finding out, today’s economy is a double-edged sword that is cutting both for and against President Obama.

Just as the Great Recession from December 2007 to June 2009 was a once-in-decades economic event, the aftermath looks like it may produce an outlier election for an incumbent president who took office at the height of the economic crisis and has tried to nurse the economy back to health with mixed and disappointing results.

The recovery, as Republican presidential candidate Mitt Romney notes repeatedly, has been frustratingly slow, with the level of employment about halfway toward what it was before the recession. Some sectors, notably housing, may not recover fully for years or decades. Other sectors, such as the auto industry, are doing well but have been downsized permanently.

The stock market is not far from making up all the ground it lost. The Dow Jones industrial average ended last week more than 700 points shy of its all-time high of 14,156. But gasoline prices also have come close to broaching record highs over $4 a gallon in recent summer driving seasons.

Political candidates and strategists who have been befuddled by the mixed performance of the economy are not alone. Economists and political scientists who have made their careers trying to accurately forecast presidential election outcomes based on the economic performance also are all over the map this year. A few point to indicators such as an unemployment rate stubbornly higher than 8 percent throughout Mr. Obama’s presidency and are predicting a victory for Mr. Romney. Others see a decisive re-election for Mr. Obama based on the improving economic environment in key swing states such as Virginia and Ohio.

Signs point both ways

Some of the favorite indicators used to forecast elections are pointing in diametrically opposite directions. The stock market, for example, has a good history of foreshadowing the victor of the presidential race. Its double-digit annual gains throughout Mr. Obama’s term and solid performance this year are pointing to his re-election. Various futures markets that enable investors to bet on the outcome of the election also have moved overwhelmingly in favor of the Democrat in recent weeks.

“The market increasingly reflects a status quo election,” with Mr. Obama winning re-election and Congress remaining divided between a Republican-led House and Democratic majority in the Senate, said Jeff Kleintop, chief market strategist at LPL Financial.

But another popular election gauge hailed as foolproof by some pundits — the Conference Board’s Consumer Confidence Index — favors Mr. Romney. It is hovering far below the 95 level that was the dividing line between incumbent winners and losers in past elections. The index shot up to 70.1 percent in September, but has been in recession territory for most of Mr. Obama’s term.

“Since its inception in 1967, [the confidence index] has been a perfect predictor of presidential incumbent election performance,” said Ben Steil, a fellow at the Council on Foreign Relations and a confidence index enthusiast. He said the gauge has been reliable because it closely tracks the ups and downs of the job market.

What the gauge is saying this year is, “It’s the jobs, stupid,” and that’s endangering Mr. Obama, he said.

Others who adhere to the theory that the job market is paramount note that no president in modern history has been re-elected with an unemployment rate higher than 7.4 percent. But even that rule must be qualified: Another rule of thumb followed by forecasters is that a large decline in the unemployment rate in the year leading up to the election bodes well for the president. That would suggest the drop to 8.1 percent last month from 9.1 percent a year ago will boost Mr. Obama’s prospects.

Diverging forecasts

Just as such widely followed indicators are contradicting one another, economic models used with success to forecast elections in the past are producing vastly different results this year. Moody’s Analytics is predicting a solid Electoral College win of 303 out of 538 votes for Mr. Obama based on the economy’s performance in swing states such as Ohio and Virginia, where the unemployment rates, at 7.2 percent and 5.9 percent respectively, are significantly below the national average.

Xu Cheng, a Moody’s analyst, said the overall sluggishness of job growth and high unemployment rates still pose obstacles for Mr. Obama and are helpful for Mr. Romney. But with so many states already in one candidate’s column or the other, it comes down to the jobs situation in 14 swing states that will decide the election, and those are breaking for Mr. Obama, he said.

In Ohio, for example — a critical swing state needed by Mr. Romney to win in most forecaster scenarios — Mr. Obama is getting a lot of mileage from his 2009 bailout of the auto industry, which Democrats argue helped to preserve jobs in the state, Mr. Cheng said.

In all, Moody’s expects Mr. Obama to win 10 of the 14 swing states. It predicts Mr. Romney will pick up Florida, which has an above-average jobless rate of 8.8 percent, and three other states — Indiana, Missouri and North Carolina.

Others have different points of view. Douglas Hibbs, a retired Swedish economics professor, has developed a “bread and peace” model that gives the election to Mr. Romney, based on the level of casualties in U.S. wars and the depressed growth of incomes in the past four years. His model, which he said is accurate in explaining every presidential vote since World War II, projects that Mr. Obama will get 45.4 percent of the popular vote.

By Mr. Hibbs’ estimate, disposable-income growth, which is running at an annual rate of less than 2 percent after adjusting for inflation, would have to soar to 4 percent in the month before the election for Mr. Obama to have a chance of re-election. However, Mr. Hibbs conceded that his model is not in sync with other forecasting models this year.

“Every election is affected to some degree by idiosyncratic factors, which at times are important enough to overwhelm the persistent influence of fundamentals,” he said. He suggested that, given the close race this year, perhaps the “best prediction of election results” will come from the Iowa electronic futures market. That investor-driven index puts Mr. Obama’s re-election chances at about 75 percent.

Adjusting for polarization

One of the most closely followed forecasting models, developed by Alan Abramowitz, a political science professor at Emory University, is predicting a narrow victory for Mr. Obama based on the 1.3 percent level of economic growth in the second quarter, combined with the president’s 49.8 percent approval rating and a 2.5 percentage point advantage he enjoys as an incumbent. That would translate to a popular vote for Mr. Obama of a little more than 50 percent, he estimates.

Mr. Abramowitz has adjusted his model to reflect the increasing polarization of the electorate, which has resulted in fewer swing voters in the past four presidential elections. He said the adjustment makes his model more accurate than ever in predicting the outcomes of presidential elections.

“With the American electorate both closely and deeply divided along party lines, we can expect another close election this year — probably closer than the 2008 election and possibly as close as the 2000 election,” said Mr. Abramowitz. “There is only one prediction that seems very safe right now — it’s going to be a long election night.”