The second half of 2011 opened with a boatload of bad economic news: rolling sovereign debt crises in Europe, a downgrade in the US credit rating, a sputtering economy, little growth in jobs, weak housing prices, and a plunging stock market. Can President Obama turn this picture around in time for the 2012 campaign? In this update, we review the record for the first half of 2011, read the tea leaves for the second half, and offer blue sky speculation about the 2012 election.
Data released in June requires some revision in our augmented misery index for the first half of 2011 (H1 2011), published in June 2011. Table 1 provides the underlying data since 1964, and figure 1 charts the augmented misery index since 2004. The headline Consumer Price Index (CPI) rose from 1.2 percent in the second half of 2010 to an annual rate of 6.0 percent in the first half of 2011, reflecting the global spike in fuel and food prices. Unemployment in June 2011 rose to 9.2 percent—its highest level so far this year—bringing the six-month average to 9.0 percent, yet still lower than the second half of 2010 when unemployment averaged 9.6 percent. The housing price index for the first half of 2011 dropped 4.5 percent compared to the second half of 2011. Together these figures result in a downward adjustment of the augmented misery index, putting it at 19.5, slightly "happier" than the reading of 20.1 which we originally published in June 2011.
The happier reading for H1 2011 was linked to an improvement in consumer sentiment, rising from 69.8 in the second half of 2010 to 72.5 in the first half of 2011. Moreover, President Obama's approval rating averaged 49 percent in the first half of 2011, up from 46 percent in the second half of 2010.
Since July 2011, the outlook has worsened. Consumer sentiment fell sharply from 63.7 in July to 54.9 in August—a level not seen since the depths of the financial crisis. Stock market gyrations captured public attention, but our research reveals only a weak historical correlation between stock market movements on the one hand, and either consumer confidence or presidential approval on the other. Evidently consumers and voters are more concerned about jobs and home values—indirectly affected by share prices—than the stock market itself. For that reason, the augmented misery index is confined to unemployment, inflation, and housing prices. Even so, a backward glance at the stock market is worthwhile. Between the second half of 2010 and the first half of 2011, the stock market barely changed—financial markets were calm. However, between June 30, 2011 and August 10, 2011 stocks plunged 15 percent, driven by the rolling sovereign debt crisis in Europe, weak US employment, a sluggish economy, and the Standard and Poor's (S&P) downgrade of US Treasury debt from AAA to AA+.1
With the deteriorating economic outlook, it's not surprising that recent polls show less confidence in President Obama. For example, a Gallup poll in June 2011 reported that 44 percent of registered voters were more likely to vote for a still unknown Republican candidate, while just 39 percent stuck with President Obama.2 What's more, the Gallup poll showed President Obama pulling just 32 percent among independents (the lowest level of his presidency), and approval ratings of 50 percent or lower in swing states.3 Another poll, conducted by Intrade on August 8, 2011, showed President Obama's chances of reelection no better than 50 percent.
What do the tea leaves say about the augmented misery index in the second half of 2011? One component should improve dramatically: headline CPI. If anything, fuel and food prices will drop in the second half, and headline inflation will probably read below 2 percent, compared with 6 percent in the first half. However, economic growth seems stuck in a rut. In June 2011, the International Monetary Fund, in its World Economic Outlook (WEO), lowered the forecast for US year-over-year GDP growth to 2.5 percent for 2011, down from 2.8 percent in its April 2011 forecast. With subpar growth, the United States will be lucky to see an average unemployment rate in the second half any better than 8.8 percent. Housing prices are likely to continue their downward trend in the second half of 2011, but at a decelerating rate. Moody's Case-Shiller House Price Forecast predicts a 3 percent decline from the middle of 2011 to the first quarter of 2012. Freddie Mac is slightly more positive, forecasting a 2 percent decline for the rest of 2011.4 Assuming 2.0 percent for headline inflation, 8.8 percent for unemployment, and a 2.5 percent fall for the second half housing prices, we anticipate an improvement in the augmented misery index, to a reading of 13.3 for the second half of 2011 (compared to 19.5 in the first half). A glance at Figure 1 (which plots the augmented misery index since 2005) and a close examination of table 1 (which presents data since 1964) reveals that the misery reading in the second half of each year is generally better than the first half—by about 3 misery points on average.5 The year 2011 looks true to form. But while 13.3 is a "happier" reading than 19.5, it remains deep in misery territory.
So what does all this mean for President Obama in November 2012? In all likelihood, the 2012 election will be heavily influenced by economic factors—reprising the presidential election of 1992, and James Carville's pithy summary: "It's the economy stupid." Perhaps the most important indicator for presidential elections is the level of unemployment. Historical statistics reveal that no president since Franklin Delano Roosevelt has been reelected when unemployment was above 7.2 percent in November of the election year. This bar applies not only to presidents seeking a second term, but also to the "in-party" candidate vying to succeed his predecessor. For presidential elections since 1964, table 2 records the unemployment rate in November of the election year, names the winner, and indicates whether he was the White House "in-party" or "out-party" candidate. To cite a few recent examples: In 1976, unemployment was 7.8 percent when Gerald Ford lost to Jimmy Carter; in 1980, unemployment was 7.5 percent when voters chose Ronald Reagan over Jimmy Carter; and in 1992, George Bush lost to Bill Clinton when the unemploym ent rate was 7.4 percent.6 Unemployment in 2012 is most unlikely to drop below 8 percent. The average November unemployment rate in the six post-1964 elections captured by the "in-party" was 5.6 percent; the average unemployment rate in the six elections captured by the "out-party" was significantly higher, 6.1 percent. This is yet another way of saying that high unemployment in 2012 will damage President Obama's reelection prospects.
|Table 2 Augmented misery index in H2 of presidential election years: 1968–2008|
|Year||Winner||Party||"In party" or "out party"||Unemployment rate in November of election year (percent)||Augmented misery index: H2|
|2008||Barack Obama||Democrat||out party||6.8||6.4|
|2004||George W. Bush||Republican||in party||5.4||-2.8|
|2000||George W. Bush||Republican||out party||3.9||-0.7|
|1996||Bill Clinton||Democrat||in party||5.4||5.9|
|1992||Bill Clinton||Democrat||out party||7.4||10.0|
|1988||George H. W. Bush||Republican||in party||5.3||3.0|
|1984||Ronald Reagan||Republican||in party||7.2||7.8|
|1980||Ronald Reagan||Republican||out party||7.5||12.8|
|1976||Jimmy Carter||Democrat||out party||7.8||7.3|
|1972||Richard M. Nixon||Republican||in party||5.3||5.5|
|1968||Richard M. Nixon||Republican||out party||3.4||6.3|
|1964||Lyndon B. Johnson||Democrat||in party||4.8||3.9|
While history does not bode well for President Obama's chance of reelection, not all hope is lost. To explain the ray of sunshine, we turn to the historical record of the augmented misery index since 1964. As with the adverse connection between high unemployment and "in-party" election prospects, our research shows an inverse relationship between the augmented misery index and the running tab of presidential approval ratings.7 Focusing just on presidential election years since 1964, table 2 shows that the augmented misery index during the second half of the year averaged 3.9 in the six elections captured by the "in-party," while it averaged 7.0 in the six elections captured by the "out-party," a significantly higher reading. In fact, the highest augmented misery index in an "in-party" victory year was 7.8—recorded in 1984, when Ronald Reagan beat Walter Mondale.
Now for blue sky speculation: Assuming headline inflation reaches 2.0 percent in the second half of 2012, and assuming unemployment falls to 8.0 percent, then if housing prices rise by 2.5 percent Barack Obama could be reelected in 2012 with an augmented misery index slightly better than Ronald Reagan faced in 1984. From President Obama's perspective, there are two keys to this political feat: He should avoid an exclusive focus on the unemployment rate in mapping his reelection strategy, and he should embrace policies that turn around the persistent decline in housing values. Economic growth over the year ahead will largely decide the unemployment rate in November 2012, and the political chances that Congress will approve new stimulus spending are approximately zero. However, more could be done to rescue housing values. The Federal Reserve has already done a lot, by pushing long-term mortgage rates to around 4 percent. Freddie Mac and Fannie Mae, now under Treasury control, could do more: They could encourage qualified households and investors to buy foreclosed homes by streamlining the mortgage application process and relaxing the down payment requirement.
This advice—based on the augmented misery index—suggests that Obama cannot coast to victory on the back of the recently enacted debt and deficit deal. To be sure, the legislation will avert another debt showdown during the campaign year, and it will probably avoid another downgrade of Treasury bonds.8 The legislation specifies $900 billion in spending cuts over the next decade, and created a senior Congressional committee to recommend another $1.5 trillion of cuts over the decade, subject to an up or down vote by November 2011.9 Failure to agree on the additional cuts will trigger automatic across the board cuts, to begin taking effect in 2013. All this is pretty good by the standards of government work. But our analysis suggests that more must be done to bring the augmented misery index into "happier" territory for Obama to have a fighting chance in November 2012.
1. Standard & Poor's was the only rating agency to downgrade the United States; Fitch and Moody's held their AAA ratings.
2. Jones, Jeffrey M. "2012 Voter Preferences for Obama, 'Republican' Remain Close," Gallup, June 16, 2011.
3. "Morning Policy Report", ISI International Strategy & Investment, August 4, 2011.
5. The underlying causes of this regularity—first discovered by John Maggs—are not clear.
6. "Labor Force Statistics from the Current Population Survey: 1948–2011," Bureau of Labor Statistics. August 11, 2011.
8. Both S&P and Moody's (which maintained the AAA rating but assigned a "negative outlook"} warned against "a weakening in fiscal discipline in the coming year." Moody's Investor Services, August 2, 2011.
9. The following Senators and Representatives were named by Congressional leaders to the Joint Select Committee on Deficit Reduction: Sen. Patty Murray (D-WA), Sen. Max Baucus (D-MT), Sen. John Kerry (D-MA), Rep. Jim Clyburn (D-SC), Rep. Chris Van Hollen (D-MD), Rep. Xavier Becerra (D-CA), Sen.Jon Kyl (R-AZ), Sen. Pat Toomey (R-PA), Sen. Rob Portman (R-OH), Rep. Jeb Hensarling (R-TX), Rep. Dave Camp (R-MI) and Rep. Fred Upton (R-MI).