When It Comes to US Elections, It’s the Economy—Perhaps

Several factors account for the apparent disconnect between headline US economic data and what polls suggest many Americans feel. Find out more from Franklin Templeton Institute’s Stephen Dover.

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.