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2012 Election

Campaign 2012: May Update

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Campaign 2012 May Update

With Mitt Romney reaching the Republican nomination threshold of 1144 delegates, and thus claiming the top spot on May 29th, Election 2012 is “officially” underway. In fact, the presumptive Republican candidate and President Obama have been in full campaign mode against each other since mid-April. With 6 months plus one week to go until November 6th, Common Sense will now be presenting monthly updates to the shifting fortunes of the Presidential race.

Election is still Obama’s to lose

I believe, as most people do, that “it’s the economy, stupid.” While the human factor – affability, trust, confidence, ideology – will undoubtedly weigh heavily on voters, the performance of the US economy in the run up to November will be the key campaign issue and deciding factor for the swing voters who will determine the winner of the White House.

Monthly unemployment data[1] through April shows a continuation of the downward trend, indicating weak but steady growth in the economy. President Obama is still just on the wrong side of “the zone” – the unemployment rate above which no President has ever been reelected. However, if current trends continue, US unemployment should be between 7.4% and 7.6% in October, when undecided voters make up their minds. That would be the same unemployment rate as Reagan when he was reelected.

The key factor in determining whether the incumbent was reelected was the trend in unemployment, not the absolute number. Presidents Clinton and W Bush were below the zone for a full 12 months prior to the election – both won handily. Presidents Reagan, Carter and HW Bush were all tied in October during their reelection year with 7.4%, 7.5% and 7.3% unemployment respectively. The difference is that the Reagan economy was creating jobs, while the Carter and HW Bush economies were destroying them or stagnant.

In President Obama’s case, even slow job growth should be enough for him to get the benefit of the doubt.

Leading Indicators

Job growth doesn’t just happen by itself. There are some leading indicators that can help us predict if the President should be stocking up on champagne, or looking for book deals with Al Gore. One of the most important of these is the data on Personal Consumption Expenditure (PCE). Consumer spending represents 70% of US GDP, it truly is the engine of growth. When households spend, businesses make profits, expand inventories and hire workers.

 

Quarterly PCE data[2] shows President Obama’s economy below the average for reelected Presidents, but still gathering steam. The results for the first quarter of 2011 are almost identical for Presidents Obama, Reagan, Clinton and W Bush, and far superior to the sharp declines experienced by President Carter. Mr. Obama’s PCE trend is also steadier than President HW Bush, sending a clearer signal to businesses.

Remember that, unlike unemployment, this is a leading indicator: it takes time for spending to translate into reduced inventories and thus to new hiring. What happens in quarters one and two is far more important for the election than what happens in quarter three. That is why the strong “rebound” in spending for both Presidents Carter and HW Bush did not benefit them at all.

As long as consumer spending continues to grow between April and June, even moderately, the trend in unemployment should remain steadily downward.

Another good indicator is spending on durable goods. During a recession, or when in fear of one, most people hold off on “big purchases” like automobiles, refrigerators, televisions. These are also items that most businesses don’t usually stock up on. So when customers start buying cars and washing machines again, it typically means that they’re not too terribly worried about the economy over the next few months.

 

That is exactly what the durable goods data[3] suggests. 2011 finished strongly and 2012 has also started off well, led by a big rebound in automobile sales. Overall durable goods expenditures have also been strong, with “Furnishings and Household Equipment” at over 10% growth in the first quarter. Consumer confidence data fell sharply in May[4] on a weak stock market and news from Europe, but not to disastrous levels. It remains to be seen if this will translate into weaker expenditures.

One reason that consumers are spending more is because more of them are employed. This is a virtuous circle: increased spending leads to more employment which leads to increased spending, and so on. It doesn’t matter how this dynamic begins, and both politicians and economists are not shy about proposing ways to achieve it. When Keynesians talk about “pump priming” or monetarists speak of quantitative easing, they are both talking of ways to turn around the vicious circle of recession, into the virtuous circle of growth.

Another powerful driver of spending, and the one I believe to be more important in this election year, is the very hard work US consumers and businesses have done in paying down their debt. Even while public debt has soared to new peace-time heights, private debt has fallen sharply. In fact, US consumers have paid down enough debt to fall below the long-term average for 1990 to 2009[5].

 

As debt servicing levels fall, disposable income rises: Americans have more money left over at the end of the month since their credit card and mortgage bills are lower. Some of that money is then spent on goods and services. Americans may still be wary of the economy, but they hold less consumer finance debt[6] than any time since 1994. Based on this, I believe it highly unlikely that spending should contract in the run up to the election, which will favor President Obama.

Not Out of the Woods Yet

There is still too much time between now and the election to make any prediction with confidence. The US economy is still highly vulnerable to the incompetence of European leaders, who seem to be exerting every effort to destroy the euro zone. A collapse of the single currency, war in the Persian Gulf, or a major natural or man-made disaster could all upset the fragile global recovery, which the United States is leading (believe it or not).

Barring anything catastrophic, however, I believe that the current trends favor President Obama’s reelection by a narrow margin. Both Mr. Obama and Mr. Romney are experienced and highly capable politicians: neither is likely to make major mistakes on the campaign trail or during debates. Both have personal strengths and weaknesses that are likely to cancel each other out. To the extent that the economy then becomes the decisive factor, Common Sense predicts – at this time – a victory for President Obama.

All the more reason that the President should be pressuring Europe to fix their problems.


Sources and Notes:

[1] Bureau of Labor Statistics, Seasonally adjusted monthly unemployment rate, series LN14000000
[2] Bureau of Economic Analysis, Seasonally adjusted quarterly percentage change in real PCE, Table 2.3.1.
[3] Ibid
[4] Reuters, “Consumer confidence cools in May,” 29 May 2012
[5] Board of Governors of the Federal Reserve System, Household Debt Service and Financial Obligation Levels
[6] Non-mortgage liabilities

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