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Sunny-Side Up


It seems eerily appropriate that on the day we observed George Washington's birthday, another revolution was taking place, this time in Libya. In what might be the third such toppling of a government in less than two months, we are witnessing more iconic scenes on television of city squares filled with people demanding change. Footage of two Libyan fighter pilots dismounting their aircraft and defecting to Malta after being ordered to bomb and strafe their fellow citizens was a scene that many of us will not soon forget.

Even the smartest foreign-policy experts and intelligence analysts could not have predicted such a turn of events. Who could have anticipated the ripple effect triggered by a street vendor in Tunisia who set himself on fire to protest what he saw as corrupt city inspectors? These are the kinds of occurrences that former Defense Secretary Donald Rumsfeld might call "unknown unknowns."

In the category of "known knowns" is the U.S. economy, a critical element in next year's presidential contest. When an incumbent is seeking reelection, voters' decisions are not choices akin to deciding between strawberry or pistachio ice cream but rather a referendum on the sitting president. "Do I want to vote to reelect President Smith or not?" The choices are actually "yes," "no," or "I don't know." If a voter's response to that question is yes, that person will almost certainly vote to reelect the president. If the answer is no, then unless the opposition party chooses a nominee who is either offensive or grossly unqualified, the voter will choose that nominee.

Although many factors are involved, we know that more than anything else, people vote their pocketbooks. If they think the economy is good or getting better, they're more likely to vote for the incumbent. If they think the economy is bad, getting worse, or maybe isn't getting better quickly enough, they're more likely to vote for the incumbent's opponent.

That's why I have been watching economic indicators and forecasts closely in recent months, looking for clues as to where the economy is going and how voters will perceive President Obama's stewardship of it in the closing months before the 2012 election. To be sure, the verdict for Obama at the time of last November's midterm was not good. But that does not mean voters will look at the situation the same way in the fall of 2012.

A rough rule of thumb is that if unemployment is at or near 9 percent, it will be a bad omen for Obama. But if the figure is at or close to 8 percent, it will be good news for the president, because the jobless rate will have improved significantly from its 10 percent level at the end of 2009. Some voters will reward Obama for progress on unemployment rather than punish him for policy or priority disagreements they may have had with him during his first two years in office.

It's extremely unlikely that we'll see an improvement along the lines of what President Reagan enjoyed when unemployment dropped 3.6 percentage points, from 10.8 percent in November 1982-his first midterm-to 7.2 percent in November 1984, when he was reelected. But a drop from the 10.1 percent mark that we had in October 2009 to 8.2 percent or so might be good enough to give Obama a second term.

Last week, the Federal Reserve Board released the minutes of the January 25-26 meeting of the Fed's Open Market Committee and a summary of economic forecasts provided by members of the board of governors and the presidents of the 12 Federal Reserve banks. Several times a year, each committee participant is asked to provide a forecast of various important economic measures, including gross domestic product, inflation, and unemployment. The minutes reveal the highest and lowest forecasts for each element, as well as the "central tendency," which is the range after the three highest and three lowest forecasts (read: the outliers) are removed.

The forecasts for GDP growth in the last quarter of 2012 range from a low of 3.4 percent to a high of 4.5 percent; the central tendency is between 3.5 and 4.4 percent. The range for unemployment is 7.2 percent to 8.4 percent, with a central tendency between 7.6 and 8.1 percent. The forecasts from the Fed are more optimistic than the latest Blue Chip Economic Indicators survey of private forecasters, who are suggesting GDP growth of 3.3 percent and an unemployment rate of 8.3 percent in the fourth quarter of 2012.

Of course, plenty of noneconomic factors will be weighing on voters' minds, including foreign policy. Whom Republicans nominate is certainly relevant, as well. But the economic indicators are looking far better for Obama today than they did six months ago, and they seem headed toward a place where presidents tend to get reelected.

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