Quick Thoughts: When it comes to US elections, it’s the economy—perhaps

Originally published in Stephen Dover’s LinkedIn Newsletter, Global Market Perspectives. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.

During the 1992 US presidential campaign pitting President George H.W. Bush against his challenger, Bill Clinton, Clinton’s campaign manager, James Carville, quipped: “It’s the economy, stupid,” when asked what would determine the outcome of the election.

Carville wasn’t stupid. He knew that presidential elections typically hinge on voters’ perceptions of the economy. A dozen years earlier, in 1980, Ronald Reagan successfully attacked incumbent President Jimmy Carter with the “misery index,” the sum of the US unemployment and inflation rates, which was then hovering at postwar peaks.

Empirically, there is plenty of evidence that economics drives presidential election outcomes. Professor Ray C. Fair of Yale University was one of the first economists to empirically verify the relationship between macroeconomic outcomes and the popular vote share in US presidential elections. Moody’s has expanded the Fair model to incorporate more economic variables, as well as techniques to forecast the electoral college outcome.

Still, no model is perfect, and neither Moody’s or Fair predicted the 2020 outcome.

The state of play in 2024

And so, we come to the 2024 contest.

At first glance, the incumbent, President Joe Biden, ought to be “crushing it.” After all, during his presidency the economy has achieved the longest consecutive streak of sub-4% unemployment in more than a half century.¹ Inflation, while still above its two-decade average, has been trending lower over the past 18 months. Accordingly, the misery index currently stands at 7.3%, down from 15% during Trump’s last year in office and below its postwar average of 9.2%.² A further plus is that the US stock market has been making record highs, with the Dow Jones Industrial Average recently breaching the headline-grabbing 40,000 level.³

Yet in virtually every poll we’ve seen, voters have expressed unhappiness with today’s economy, and most lay the blame squarely on Biden. For instance, in one recent survey, 57% of Americans “somewhat or strongly” disapproved of Biden’s handling of the economy.⁴ Nearly two-thirds of Americans considered the economy “good” under President Trump, with fewer than 40% saying the same for Biden’s track record.⁵

What accounts for the discrepancy between economic statistics and what voters are saying? Why do most Americans believe the economy is worse today than it was under Trump? What are the implications for the November election?

Explaining the disconnect

Several factors account for the apparent disconnect between the headline economic data and what polls suggest many Americans feel.

For example, the media (including social media) may be partly responsible. Polls, including one from Axios last year,⁶ suggest that while most Americans can be positive about their personal financial situation, they still can feel that the economy is bad (for others). That wedge between one’s own reality and the perception of others’ fortunes may be due to a negative news bias in the media.

Inherent human bias might also be at work. As behavioral psychology notes, humans are prone to assign greater importance to recent events. High inflation in 2022, for example, is probably impacting sentiment more than (fading) memories of soaring unemployment in 2020. Loss aversion is another explanation. It could explain why high costs for most goods and services matter more than rising wages. Loss aversion could also explain the anomaly between polling results and the misery index. Plentiful jobs, while welcome, are not deemed as important a barometer of well-being as high prices, which are decidedly unwelcome.

In contrast to what economists believe (and statistics suggest has been important in the past), voters may also care more about price levels than price changes, i.e., the rate of inflation. Frequent purchases, such as groceries or gasoline, are reminders that “things” have become more expensive, even if the rate of change of those same prices has fallen substantially from its apex two years ago, or—in some cases—might even have turned negative.

House prices, which have risen sharply in recent years, are another concern. While homeowners ostensibly benefit from positive wealth effects, renters and younger Americans wanting to get on the housing ladder are dismayed. Significantly higher mortgage rates are adding to their woes, putting home purchases out of reach for many Americans.

Perceptions of fairness may also be at work. Real wages for the bottom quintile of Americans have risen steadily since 2013 (aside from a brief pandemic disruption), with particularly strong gains in 2022 (probably continued into 2023).⁷ But both income and wealth for the top 10% and top 1% have risen even more sharply, reinforcing beliefs that while personal conditions have improved, something is nevertheless “wrong” with the overall economy.

Lastly, when it comes to the macroeconomy, incumbent presidents shoulder blame, whether deserved or not. For many Americans, US inflation is largely blamed on “Biden” budget deficits or mistakes the Federal Reserve made. Yet inflation has been a global issue, witnessed in fiscally or monetarily profligate and more responsible countries alike. In short, “Bidenomics” may not have been solely or even chiefly responsible for surging US inflation in 2022. Nevertheless, as President Truman’s adage puts it, the buck stops at the president’s desk, irrespective of what brought it there.

Implications for the elections

As is commonly known, US presidential elections hinge on outcomes in “swing” states, which tip the electoral college to one of the candidates. According to a recent CNN poll,⁸ negative impressions of Biden’s handling of the economy are particularly acute in those “battleground” states. Echoing the disconnects observed above, about half those polled in swing states consider their personal financial position as “fine,” but only a quarter of respondents characterize the economy as having improved in the past two years.

Take North Carolina as an example. By a two-thirds majority, North Carolinians view their state’s economy as “positive” but see the national economy as “negative.”⁹ Similar large gaps in perceptions of what voters experience locally and believe nationally crop up in other swing states, too. That’s a major challenge to Biden’s re-election chances.

Econometrics and history tell us that the economy consistently matters more to voters than any other issue. If so, recent polling—and the reasons behind it—do not bode as well for President Biden’s re-election as the misery index alone might indicate.

That said, economics may not be as important in this election. In recent years, voter turnout has been mobilized by other issues, including immigration, crime, Supreme Court decisions, or social concerns. President Trump’s legal troubles may also impact the outcome. Lastly, as in the 1992 and 2000 presidential elections, the presence on the ballot of third-party candidates could tip the electoral college scales.

We see one thing as certain. A lot rides on the outcome, particularly for investors. While both parties agree on some issues (for instance, tariffs on imports from China), genuine policy differences are as stark today as at any time in postwar US history (see my prior article, “Do elections matter for markets?). Trump-era tax cuts will be up for renewal—or not—in 2025. Biden-era subsidies for renewable energy may be rolled back, or extended, depending on the outcome. Regulation of various sectors, ranging from energy and mining to healthcare, pharmaceuticals or telecommunications, could differ markedly according to who wins.

This election cycle  is about to get interesting.