Download Macroeconomics and Presidential Elections

Macroeconomics and Presidential Elections
WEEKLY MARKET UPDATE
With the start of July, it’s now “just” 16 months until we have our next
presidential election in the United States. Republican candidates have already
begun the long process of party debates and fund-raising efforts. President
Obama wasted no time as well, officially launching his re-election campaign
effort back in March. This upcoming election will likely focus on the economy
and involve major debates over important issues to investors—such as basic
policies regarding taxation, spending (notably entitlement spending), job creation
and the fundamental role of the government in our economy. As a result, the
election outcome could have significant consequences for the types of policies,
incentives and legislation that will be pursued post-November 2012.
J U N E 28, 2011
Jim Finnegan, CFA
Investment Writer
It’s Still the Economy—With a Twist
As campaign manager for former President Clinton’s first election in 1992, James
Carville made the now famous remark which defined Clinton’s campaign strategy of
“It’s the economy, stupid.” Eighteen years later, much has changed in the landscape
of presidential election campaign strategy. Perhaps the most important change has
been the increased polarization of both ends of the political spectrum. One only needs
to tune into certain programs on left or the right of the talk radio or cable television
to understand this point.
Nonetheless, economic issues will likely play a central role in the 2012 election. But due
to this increased polarization of the electorate, the most important factor is how these
issues will play out with the moderate, independent and swing voters who increasingly
play a decisive role in election outcomes. However, it is also important for candidates to
mobilize their support base (those individuals who would never shift alliances) because
their money and votes (turnout among the faithful) are also crucial. And herein lies the
challenge—to frame a campaign strategy that energizes the loyal base but also appeals
to independent voters.
Lessons from Bush and Carter?
Given the challenging economic situation we currently face and the fact that we have
an incumbent president seeking a second term, many observers have turned to
two past elections—Jimmy Carter in 1980 and George H.W. Bush (Bush I) in 1992—
for some insights. But the more you delve into the details of those elections, the more
you realize that each election is unique despite the apparent similarities in economic
circumstances.
Carter faced a bruising challenge to his candidacy within his own party from Edward
Kennedy, which reduced his support among liberal and traditional Northeast Democrats.
(The impact of John Anderson as a third party candidate in the general election is less
clear.) Bush I avoided the kind of intraparty conflict Carter faced at his party’s 1992
convention in Houston, but had to contend with a strong third party candidate (H. Ross
Perot). Perot, while not garnering a single Electoral College vote, captured nearly 20%
of the nation’s popular vote—which was perceived as a blow to Bush I. (Clinton won the
election with 43% of the total popular vote to Bush’s 38%).
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WEEKLY MARKET UPDATE
In contrast—and barring any new
surprise—President Obama is unlikely
to face either of these challenges
when he runs for re-election in 2012.
His greater challenge will likely be
maintaining the energy of his core
constituencies (e.g., organized labor,
the green movement, young voters in
general) while accommodating concerns
of independent voters regarding budget
deficits, government spending, taxes and
slow economic growth. And an important
wild card—which will determine Obama’s
ability to maneuver during the campaign—
is whom the Republicans select as their
candidate. A Tea Party favorite would
provide him with much more room to
navigate between the left and center
than (for example) an established
(right-center) political player such as Tim
Pawlenty (former governor of Minnesota)
or Rick Perry (current governor of Texas,
who is rumored to be considering a run).
Macroeconomics and
Past Elections
If we look at a range of past elections
instead of focusing on one or two in
particular, we can begin to draw some
general insights for the role that the
economy can play in an election. In the
table on the next page, we’ve collected
basic but important economic data for
the past 11 presidential elections going
back 43 years. It includes the average
rate of real annual GDP* growth in the
three quarters of the year leading up to
the election, the 12-month average rate
of inflation as measured by the Consumer
Price Index (CPI) for the 10 months
leading up to the election (January to
October), and the average rate of civilian
unemployment over this same 10-month
J U N E 28, 2011
period. Also included are May 2011 data
for the current Obama administration.
The fourth factor is the Thomson/
Reuters University of Michigan Consumer
Confidence Index, a survey-based
measure of peoples’ confidence in both
their current economic situation and
their outlook for the coming year. Since
this is based on perception that can be
swayed in part by presidential campaigns,
conventions and debates, the number
shown for this index is the average of five
months (June to October) leading up to
the election.
Because it’s not just the average level of
these four factors that influence people
but any trends (positive or negative)
associated with them, we’ve also included
arrows to show when a particular statistic
had been trending up or down over the
time frame in a meaningful way. And
finally, in an effort to make all these
data as visually intuitive as possible, we
used color-coding where blue implies
a positive/favorable result or trend, red
implies a poor/negative result or trend,
and black suggests a moderate/neutral
result as it relates to Americans’ voting
preferences.
[Obama’s] greater challenge
will likely be maintaining the
energy of his core constituencies
(e.g. organized labor, the green
movement, young voters in
general) while accommodating
concerns of independent voters
regarding budget deficits,
government spending, taxes and
slow economic growth.
It’s worth noting that none of these
four factors captures the unique
circumstances (e.g., war, political
scandals, differences between candidates
in funding, or intraparty challenges to
the nomination) that are important to
individual election outcome. So the
goal of this analysis is to look for broad
insights of which macroeconomic factors
have been associated with successful or
failed elections across a wide range and
time frame of presidential elections.
*Gross domestic product (or GDP) is a measure of the total
economic output in goods and services for an economy.
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J U N E 28, 2011
Macroeconomic Factors and Past Presidential Elections
Election
Year
Incumbent &
Candidate
Real GDP
Growth (%)
Inflation
Rate (%)
1968
Johnson
Humphrey (Dem)
6.1%
4.2%
3.6%
94
Humphrey
Loses (43%)
1972
Nixon
Nixon (Rep)
7.0%
3.3%
5.7%
91
Nixon Wins
(61%)
1976
Ford
Ford (Rep)
4.8%
5.9%
7.1%
80
Ford Loses
(48%)
1980
Carter
Carter (Dem)
-2.4%
13.8%
7.1%
49
Carter Loses
(41%)
1984
Reagan
Reagan (Rep)
6.3%
4.4%
7.6%
103
Reagan
Wins (59%)
elections instead of focusing
1988
Reagan
Bush I (Rep)
3.1%
4.1%
5.5%
98
Bush I Wins
(53%)
can begin to draw some general
1992
Bush I
Bush I (Rep)
4.3%
3.1%
7.5%
63
Bush I
Loses (37%)
1996
Clinton
Clinton (Dem)
4.5%
2.9%
5.4%
96
Clinton Wins
(49%)
2000
Clinton
Gore (Dem)
3.1%
3.4%
4.0%
123
Gore Loses
(48%)
2004
Bush II
Bush II (Rep)
2.9%
2.5%
5.6%
97
Bush II Wins
(51%)
2008
Bush II
McCain (Rep)
-1.4%
4.5%
5.6%
41
McCain
Loses (46%)
May
Obama
Obama (Dem)
1.9%
3.4%
9.1%
61
Obama ???
2011
Unemployment
Rate (%)
Consumer
Confidence
Election
Result
If we look at a range of past
on one or two in particular, we
insights for the role that the
economy can play in an election.
Notes:
(1) Real GDP Growth figures are the annualized rates averaged over the first three quarters of the election year.
Notes:
(2) Inflation Rate is based on the 12 month change in Consumer Price Index and is an average of the first 10 months (Jan to Oct) of
(1)theReal
GDP Growth
election
year.figures are the annualized rates averaged over the first three quarters of the election year.
Civilian
an average
of the
months
(Jan of
to the
Oct)
election
(2)(3)Inflation
RateUnemployment
is based on the 12Rate
monthischange
in Consumer
Pricefirst
Index10and
is an average
firstof10the
months
(Jan toyear
Oct) of the election year.
(4) Consumer Confidence is based on the University of Michigan Index (1985=100) and is the average of the last five months June to
(3)Oct)
Civilian
Unemployment
Rate is an average of the first 10 months (Jan to Oct) of the election year
of the
election year.
Color codes
(general):
Black=Moderate/Neutral;
(4)(5)Consumer
Confidence
is based Blue=Favorable;
on the University of Michigan
Index (1985=100) and isRed=Poor.
the average of the last five months (June to Oct) of the election year.
(6) Arrows indicate trend in statistic shown over the period on which the average is based on: upward arrow (increasing); downward
(5)arrow
Color (decreasing);
codes (general): Blue=Favorable;
Black=Moderate/Neutral; Red=Poor.
no arrow (steady).
Colorindicate
codestrend
combined
arrows
trend
indicated
is favorable
( blue) or
poor (red).
(6)(7)Arrows
in statisticwith
shown
over theindicate
period onwhether
which the the
average
is based
on: upward
arrow (increasing);
downward
arrow (decreasing); no arrow (steady).
(8) Color codes for Real GDP Growth: 4.0% or higher (blue), 1.0% or less (red) and 1.1% to 3.9% (black).
(7)(9)Color
codes
combined
with
arrows
indicate
whether
the
trend
indicated
is
favorable
(blue)
or
poor
(red).
Color codes for Inflation Rate: 5% or higher (red), 3% or less (blue), 3.1% to 4.9% (black).
Rate:(blue),
4.0%1.0%
or less
7%1.1%
or higher
(8)(10)
ColorColor
codescodes
for Realfor
GDPUnemployment
Growth: 4.0% or higher
or less(blue),
(red) and
to 3.9%(red),
(black).4.1% to 6.9% (black).
(11) Color codes for Consumer Confidence Index: 90 or higher (blue), 70 or less (red), 71 to 89 (black).
(9)(12)
ColorPercent
codes fornext
Inflation
Rate: 5%
higher
(red), 3%
or lesscolumn
(blue), 3.1%
to 4.9%percent
(black). of popular vote earned by candidate.
to name
in or
the
Election
Result
indicates
(13)Color
"Dem"
for (red),
Democrat;
stands for Republican.
(10)
codesinfor"Incumbent
Unemploymentand
Rate:Candidate"
4.0% or lesscolumn
(blue), 7%stand
or higher
4.1% to "Rep"
6.9% (black).
(14) June 2011 data for Obama are based on most recent values for each statistic and trend since beginning of year.
(11)
Color codes for Consumer Confidence Index: 90 or higher (blue), 70 or less (red), 71 to 89 (black).
Sources:
Real
GDPnext
Growth:
Commerce
(12)
Percent
to nameU.S.
in theDepartment
Election Result ofcolumn
indicates percent of popular vote earned by candidate.
Inflation Rate: U.S. Bureau of Labor Statistics
(13)
“Dem” in “Incumbent
Candidate”
column
stand Statistics
for Democrat; “Rep” stands for Republican.
Unemployment
Rate:and
U.S.
Bureau
of Labor
Consumer
University
of Michigan
Confidence
Index
(14)
May 2011 Confidence:
data for Obama Thomson/Reuters
are based on most recent
values for each
statistic andConsumer
trend since beginning
of year.
Popular Election Vote Results: Library of Congress
Sources:
Real GDP Growth: U.S. Department of Commerce
Inflation Rate: U.S. Bureau of Labor Statistics
Civilian Unemployment Rate: U.S. Bureau of Labor Statistics
Consumer Confidence: Thomson/Reuters University of Michigan Consumer Confidence Index
Popular Election Vote Results: Library of Congress
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One important insight from the table
is that consumer confidence in their
economic situation and outlook is highly
correlated with presidential election
outcomes for the incumbent and his party.
An average index value of 80 or less
(four instances—Ford in 1976 where the
average was 80 but falling substantially,
Carter in 1980, Bush I in 1992, McCain
in 2008) always led to a loss. And since
this index is a reflection of economic
reality in terms of GDP growth, inflation
and unemployment, it’s no surprise that
in all four of these cases, there were
“red numbers” for at least one of these
statistics in the chart above.
There were also two cases where
incumbents had consumer confidence
index values well above 80 but still lost—
Humphrey in 1968 and Gore in 2000.
But there are unique circumstances to
explain this. First, both Humphrey and
Gore were vice presidents attempting to
succeed their predecessors (Johnson
and Clinton), not incumbents seeking
re-election. Second, both faced third
party challengers (Eugene McCarthy and
Ralph Nader) which affected the votes
they captured. And third, both were in
situations where consumer confidence
was rapidly trending downward—
indicating that recent trends are as
important as average values to voters.
Another insight (although hardly
surprising) is that elections where the
incumbent or his successor campaigned
on strong economic performance (no “red
numbers” for any of the four statistics in
the table) has always led to a win—Nixon
in1972, Bush I in 1988 and Clinton in
1996—if we ignore Humphrey in 1968
(who was saddled with major dissent
within his party over the Vietnam War).
We could add Reagan in 1984 to this list
since his only substantial weakness was
continued high unemployment (averaging
7.6%), which was rapidly declining due to
strong economic growth. The converse
is also true: An incumbent or successor
running with at least two “red numbers”—
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J U N E 28, 2011
Ford in 1976, Carter in 1980, Bush I in
1992, and McCain in 2008—always lost.
Implications for 2012
Sixteen months is a veritable lifetime
in the world of presidential politics and
campaigns, and major factors such as
President Obama’s opponent have yet
to be determined. However, even with
those caveats, the current situation he
faces for re-election based on the four
economic statistics we show for May
2011 is a challenging one. It is very
unlikely unemployment will drop below
7% (the threshold for a red number in
the table) over the next 16 months. That
would require the equivalent of creating
approximately 6.5 million new jobs, or
about 400,000 per month between
July and October 2012. Since the
current recovery began in July 2009,
the average has been approximately
75,000 per month.
High unemployment is not a
barrier to re-election so long
as it is trending downward
in a meaningful way and
accompanied by robust
economic growth.
The good news (as Reagan demonstrated
in 1984) is that high unemployment is
not a barrier to re-election so long as it is
trending downward in a meaningful way
and accompanied by robust economic
growth. Most people recognize that
unemployment is a lagging indicator. But
the challenge for President Obama (and
no doubt one area he will pay tremendous
attention to) is how he can both reverse
the recent slowdown in GDP growth
and jump-start a trend toward the kind
of real growth that can begin to add
200,000 to 300,000 new jobs each
month over the course of his campaign.
One risk he will run in aggressively trying
to drive higher growth is that inflation
could also rise given its recent trend
in an upward direction and the U.S.’s
current accommodative monetary policy.
Furthermore, attempts to achieve this
substantially higher real GDP growth via
additional Keynesian style government
spending and stimulus will contribute
to the budget deficit and run headlong
into resistance among Congressional
Republicans.
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J U N E 28, 2011
Jim Finnegan, CFA
Jim is responsible for investment analysis, reporting and writing for three investment disciplines
at American Century Investments. He joined the firm in 2007. He holds a bachelor of science
degree in chemical engineering from Clarkson University, a master’s degree in business
administration with a major in finance from Harvard Business School and a master of science
in investment management from Boston University. He is a CFA charterholder and member of
the Kansas City CFA Society.
The opinions expressed are those of American Century Investments and are no guarantee of the future performance of any American
Century Investments portfolio. This information is not intended to serve as investment advice; it is for educational purposes only.
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