As crystal balls go, ecomomic history is a spotty predictor of presidential elections.
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It is commonly believed that economic developments are important factors in determining the outcome of presidential elections. Conventional wisdom holds that an incumbent president will be re-elected when the economy has performed well. Otherwise, the challenger has an advantage.
I recently ran across an analysis of this perception. I was curious if it would give any insight into this year?s presidential contest. In this study, two economic indicators ? the economic growth rate, and the rate of unemployment ? were compared between the first term of an incumbent president and the last term of the previous president. Beginning with 1956, six elections where an incumbent was running for re-election were examined.
Of these six, three were won by the incumbents ? Eisenhower in 1956, Reagan in 1984, and Clinton in 1996. Three were won by the challengers ? Carter in 1976, Reagan in 1980, and Clinton in 1992. All three incumbents who lost had economic growth rates during the last two years of their term below those of the previous administrations. But, two of the three also had lower unemployment rates.
Of the three incumbents who won, only Eisenhower had lower two-year economic growth than the previous president. But, growth during the last year of his first term was phenomenal, exceeding 7 percent. Interestingly, of the three, only Eisenhower had a lower unemployment rate.
Overall, when it comes to re-electing a president, these data suggest that voters care more about economic growth than falling unemployment.
What does this tell us about the upcoming election? Obviously, we do not yet know the entire story of the final two full years of Mr. Bush?s current term. But a comparison of the last 15 months with Mr. Clinton?s second term is revealing: the Bush economic growth rate was 3.3 percent compared to Clinton?s 4.2 percent; and the Bush unemployment rate was 5.9 percent compared to 4.4 percent during the final Clinton term.
Given that voters appear to give greater weight to economic growth than employment indicators, this would seem to suggest trouble for the incumbent?s re-election. However, keep in mind that Mr. Bush was fortunate enough to have an economic recession right at the beginning of his term. In his first year, economic growth was a paltry one half of one percent. Growth has since increased steadily. Most observers expect it to top 4.5 percent this year as a whole. If so, this may create somewhat of an ?Eisenhower effect? for Mr. Bush by the time of the election.
The bottom line ? looking at two key economic indicators and previous presidential elections, Mr. Bush appears to have his work cut out for him, in terms of convincing the voting public that he deserves a second term. Right now, most opinion polls show that a majority of Americans give him relatively poor marks for his handling of the economy. Further, other economic indicators ? particularly inflation and interest rates ? appear likely to provide some negative news in upcoming months.
To the extent the economy will be a determining factor in this year?s presidential election, the outcome could well turn on whether there is a pronounced spurt of economic growth this summer. The challenger will, no doubt, try to focus voters on the most dismal data, fueling anxieties about health care costs, energy prices, college tuition, interest rates and other costs of living.
History is only an imperfect guide to how this will all sort out. With non-economic issues dominating much of the news this year, economic indicators may only weakly point toward the final result. But to dismiss them would be an error.