Friday, October 23, 2015

Forecasting the Presidential election: simply knowing whether the economy is expanding or in recession gives you the correct answer more than 2/3 of the time


- by New Deal democrat

If you want a quick and dirty guide to whether an incumbent political party will retain control of the White House in a Presidential election, simply knowing whether the economy will be in expansion or recession in the 3rd or 4th quarter of the election year gives you the correct answer more than 2/3's of the time.

The NBER maintains the official list of US recessions going back over 160 years to 1854.  During that time, there have been 33 recessions, and 40 Presidential elections.  Eleven of those Presidential elections have taken place during a recession (measured by the 3rd or 4th Quarter of the election year).  

In only 3 cases has the incumbent party been successful maintaining control of the White House (and in one of those cases, the incumbent party's candidate lost the popular vote, but won in the Electoral College).  In the other 8 cases, the incumbent party lost, including at least 3 of the biggest political turning points in US history (1860, 1932, 1980).

Similarly, of the 29 times the economy has been expanding during the 3rd and 4th Quarter of an election year, the incumbent party has retained control of the White House nearly 3/4 of the time.

Here's the complete list:

Recession, incumbent party maintains control (3 elections):

1876 - Hayes (R, succeeds R Grant)*
1900 - McKinley (R re-elected)
1948 - Truman (D, elected)**

Recession, incumbent party loses control (8 elections):

1860 - Lincoln (R, replaces D Buchanan)
1884 - Cleveland (D, replaces R Arthur)
1896 - McKinley (R, replaces D Cleveland)
1920 - Harding (R, replaces D Wilson)
1932 - FDR (D, replaces R Hoover)
1960 - Kennedy (D, replaces R Eisenhower)
1980 - Reagan (R, replaces D Carter)
2008 - Obama (D, replaces R Bush)

Economic expansion, incumbent party retains control (21 elections):

1856 (D Buchanan succeeds D Pierce) 
1864 (R Lincoln re-elected) 
1868 (R Grant replaces R Johnson)
1872 (R Grant re-elected)
1880 (R Garfield succeeds R Hayes)
1904 (R Teddy Roosevelt elected)**
1908 (R Taft succeeds R Teddy Roosevelt)
1916 (D Wilson re-elected)
1924 (R Coolidge elected)**
1928 (R Hoover succeeds R Coolidge)
1936 (D FDR re-elected)
1940 (D FDR re-elected)
1944 (D FDR re-elected)
1956 (R Eisenhower re-elected)
1964 (D Johnson elected)**
1972 (R Nixon re-elected)
1984 (R Reagan re-elected)
1988 (R Bush succeeds R Reagan)
1992 (D Clinton re-elected)
2004 (R GW Bush re-elected)
2012 (D Obama re-elected)

Economic expansion, incumbent party loses (8 elections):

1888 (R Harrison replaces D Cleveland)
1892 (D Cleveland replaces R Harrison)
1912 (D Wilson replaces R Taft)
1952 (R Eisenhower replaces D Truman)
1968 (R Nixon replaces D Johnson)
1976 (D Carter replaces R Ford)
1992 (D Clinton succeeds R Bush)
2000 (R Bush succeeds D Clinton)*

*lost popular vote; decided in Electoral College
**predecessor of same party died in office

Bottom line:  while an ongoing recession at the time of the election does not always mean that the incumbent party will lose control of the White House, it spells DOOM by better than a 2:1 ratio.  

Similarly, while an ongoing economic expansion at the time of the election does not guarantee that the incumbent party will retain control of the White House, it has been a meant success by better than a 2:1 ratio.

UPDATE:  If we go by popular vote rather than Electoral College victory, then the elections of 1876 and 2000 fall into line, meaning that the  popular vote in fully 80% of all Presidential elections correlates positively with whether or not the economy has been in recession or not at the time of the election.

By the end of next week, all but one of the long leading indicators, designed to tell us 1+ year out whether the economy will be expanding or in recession, will have been reported for Q3, meaning that we should have visibility through the 3rd Quarter of next year.