Presidential Politics & The Business Cycle

War and the business cycle are the two primary factors influencing presidential elections. There are other forces, of course, but it’s hard to win if one or both of these big-picture variables are working against you.

War is the more complicated political variable. It may help or hinder, depending on the conflict and the candidate. Franklin Roosevelt was never in serious danger of losing re-election during World War Two. Lyndon Johnson’s political fate, on the other hand, was all but doomed by the Vietnam War.
The business cycle, by comparison, is much closer to throwing off political effects in a binary process. When the economy’s growing, that’s a big plus for your re-election prospects; recessions, on the other hand, almost always mean trouble for an incumbent seeking a second term. A smooth talker may be able to spin a troublesome war to his advantage in the public square of debate, but that’s a much tougher challenge with a contracting economy.
There’s always a danger of generalizing relationships, of course, but as Ray Fair, a Yale economics professor, notes in a newly updated edition of Predicting Presidential Elections and Other Things, no one should underestimate the connection between the economy and presidential elections.
As for the current incumbent, “the improving economy is swinging the pendulum in President Barack Obama’s favor in the 14 states where the presidential election will likely be decided,” the Associated Press reports.
But economic analysis that’s filtered through a political lens is vulnerable to, well, politics. Economist Larry Kudlow, who makes no secret of his preferences for White House occupants whose political party begins with “R”, opines that there’s been little if any improvement on the macro front in terms of the President’s odds for victory in November. “The unemployment rate may have come down to 8.3%,” Kudlow allows. “But the problem for several years is that discouraged workers have been dropping out of the labor force. So real-world unemployment is considerably higher than the official stats.” He continues:

And if all this weren’t bad enough for the president, recent economic numbers are going in the wrong direction: Initial jobless claims have increased about 6%. Existing homes sales and housing starts have fallen the last two months. Manufacturing, which has been a very positive story (assisted by rock-bottom natural-gas prices from the shale revolution), actually fell last month. And while retail sales continue to be a bright spot, incomes after inflation — including high gas and food prices — may not be keeping up.

Another economist at the opposite end of the political spectrum argues that Obama’s record on jobs isn’t as dismal as the Republicans would have you believe. “Yes, Mr. Obama’s jobs record has been disappointing — but it has been unambiguously better than Mr. Bush’s over the comparable period of his administration,” Paul Krugman writes.

This is especially true if you focus on private-sector jobs. Overall employment in the Obama years has been held back by mass layoffs of schoolteachers and other state and local government employees. But private-sector employment has recovered almost all the ground lost in the administration’s early months. That compares favorably with the Bush era: as of March 2004, private employment was still 2.4 million below its level when Mr. Bush took office.

If we consider Obama’s political fortunes as directly tied to the presence or absence of a recession proper, then there’s reason to think that the president’s re-election prospects are still favorable, if only slightly. Economists and policy wonks can surely make a strong case that the economy is suffering, but it’s debatable how much any of this is destined to throw the election to Mitt Romney, given what we know about the economy at the moment. Although no one thinks the recovery in the last several years has been adequate, what’s relevant for November 6 is what happens between now and then. The operative question: Will the economy sink into a new recession? If it does, will it deteriorate soon enough, deep enough, to capsize Obama’s job at 1600 Pennsylvania Avenue?
No one really knows the answer, although with the latest numbers in hand it’s clear that the economy will have to suffer an unusually steep and dramatic decline in the next several months to cast a much darker pall over Obama’s re-election odds. For instance, consider recent U.S. economic history based on the coincident and leading indicators published by the Philadelphia Fed. This particular set of indicators is compiled based on aggregating state data, in contrast with other methodologies that use national numbers. The message in the Philly Fed’s leading index for the U.S. is that the economy overall will continue to expand. The Conference Board’s leading indicator also anticipates continued growth.

If expecting the expansion to roll on is overly optimistic and there’s a recession approaching, we should expect to see the leading indices tumble sharply in the next several months. Some analysts are warning of no less, in part based on the slowdown in job growth and industrial production in March.
But a slowdown in the rate of growth isn’t a recession. With only six full months left before the election, the President can take some comfort from the fact that the overall economy is still growing, according to the broad sweep of economic data available. The American economy isn’t likely to suffer another 2008-style sudden lurch downward without a dramatic shock, such as a new war with Iran that sends oil prices sharply and suddenly higher, or a new and dangerous phase in the euro crisis.
As for the U.S. economy, there’s still a fair amount of forward momentum to keep a recession at bay for the foreseeable future. Some economists think otherwise, but that’s a speculative view. If you’re looking for a high-confidence prediction on the major turning points in the business cycle, there’s a strong case for arguing that the best we can do is identifying new recessions early on in the process. In other words, once a recession has started, it’ll be relatively conspicuous in the data. By that standard, it’s highly unlikely that the National Bureau of Economic Research will eventually designate March 2012 as the start of a new recession. As for April, there’s limited data to say much of anything at this point; beyond that, well, good luck.
Still, the recovery is starting to look vulnerable, relative to the three months through February. Is that a sign of deeper trouble? Maybe, but if it is we’ll soon see confirmation in the numbers. For now, however, there’s only guesses, and the bias for growth, although modest, continues to have the upper hand.