You are probably familiar with the well-known statistic that, on average, the U.S. stock market has historically performed better when a Democrat rather than a Republican occupies the White House. I’ve always dismissed this factoid as one of the many spurious correlations that equity strategists like to dwell on during presidential elections. Well, I formally apologize for my arrogance and will take the “stocks prefer Democrats” statistic seriously from now on!
Sparked by a question at PIMCO’s recent Cyclical Forum about whether Democratic recessions differ from Republican recessions, I compared the official National Bureau of Economic Research recession dates with American presidents’ terms of office. The result was stunning: Nine of the past 10 U.S. recessions occurred under a Republican president. The one exception (in 1980) was under Jimmy Carter and lasted just six months. (The Great Recession was already a year old when Barack Obama inherited it from George W. Bush, and it ended six months into his presidency.)
Moreover, not only do Democratic presidents generally not “do” recessions, Republican presidents seemingly can’t do without them. Fathom this: Each of the six Republican presidents since the Second World War presided over a recession, and some more than one – there were three under Trump’s self-declared idol, Dwight “Ike” Eisenhower, and two each under Richard Nixon and George W. Bush.
Self-inflicted recessions?
Why is it that Republican presidents and recessions appear so intricately linked? A Democrat might say it shows Republicans are either economically incompetent or simply don’t care about Main Street and the scars left by periods of high unemployment. A Republican might say (or tweet) that it’s because Republican presidents have to clean up messes created by their Democratic predecessors. But an economist might suspect that Republicans have better understood the theory pioneered by Yale economist William “Bill” Nordhaus that it makes sense for a freshly inaugurated president to engineer a recession early on and then ride the recovery to maximize employment when up for re-election (see his 1975 article “The Political Business Cycle” in The Review of Economic Studies). It seems that Eisenhower, Nixon, Reagan and George W. Bush had read the Nordhaus paper – some even before it was published!
More seriously, we shouldn’t overstate a president’s ability to create or avoid recessions. Several Republican recessions were likely due largely to bad timing, including the influence of the Korean War in the early 1950s and the oil price shocks of 1973, 1979 and 1990. The Federal Reserve played an important role as recession-maker and breaker, too. And some Republican presidents indeed inherited unbalanced, overheating economies.
