The Election is Still a Long Way Off

The current spike in gasoline prices and the flap over the Obama administration’s proposed requirement that religiously affiliated institutions provide their employees health insurance covering contraception are useful reminders that economics and politics are both dynamic, not static. It’s always risky to project that the status quo will hold, particularly when an election is more than eight months away.

There’s no question that the economic numbers over the past five months have been significantly better than they were in the first nine months of 2011. They’ve risen from a level at which any president would have a difficult time getting reelected to one that suggests this might be a competitive race that could go either way. But those numbers are in the abstract. The 30-cent surge in gasoline prices in recent months is largely attributable to political instability in Iran and elsewhere in the Middle East, and it is something that average voters can see, feel, touch, and hate. Don’t be surprised to see anger start bubbling up anytime now.

It’s anyone’s guess where the economy, unemployment, and gas prices will be this summer. We should be mindful of the fluidity of economic news, good or bad. Things (other than gasoline prices) look better now than they did four months ago, but what will they look like four or eight months from now? Will Europe fall into a recession? Will there be a collapse of major financial institutions in the eurozone? These are very big questions that cannot be answered now.

Similarly, controversies can pop up literally overnight, altering how we perceive the political and economic terrain. President Obama’s fumbling of the contraception issue last week—ending in a compromise that should have been his administration’s starting position—stole headlines from very pro-mising job news. The Bureau of Labor Statistics reported a drop in initial unemployment claims, and its Job Openings and Labor Turnover Study survey showed there were 3.4 million job openings nationwide on the last day of December 2011, compared with 3.1 million on the last day of November. These great stories for the White House got stepped on by the contraception fight.

Even the smartest economists in the country disagree about the U.S. economic outlook. In February’s Blue Chip Economic Indicators survey of 56 top economists, the consensus forecast for 2012 was that gross domestic product would grow at 2.1 percent in the first quarter (down from 2.8 percent in the fourth quarter of 2011), then edge up to 2.2 percent in the second quarter, 2.4 percent in the third, and 2.6 percent in the fourth. In terms of unemployment, the consensus projection was an 8.4 percent average rate for the first quarter (0.1 percent above January’s rate), then 8.3 percent in the second quarter, 8.2 percent in the third, and 8.1 percent in the fourth.

In my view, if the overall unemployment number is 8.1 percent in the fourth quarter of this year, Obama is very likely to get reelected. Although not at the 7.2 percent level that President Reagan had in November 1984, down from 10.8 percent two years earlier, it would likely be enough to win—albeit, not in the 49-state landslide fashion Reagan enjoyed.

One of the useful aspects of the Blue Chip study is that it averages the 10 most optimistic projections as well as the 10 most pessimistic ones. The optimists project unemployment in the first quarter of this year to stand at 8.2 percent, then to fall successively to 8.1 percent, 7.9 percent, and 7.7 percent in the other three quarters—getting closer to Reagan-land unemployment numbers.

However, the pessimists foresee unemployment rising to and holding at 8.6 percent in the first and second quarters, and standing at 8.5 percent in the third and fourth—much more in jump-ball territory than “advantage Obama.” The difference is that the pessimists are projecting GDP growth to be under 2 percent for the entire year, while the optimists are forecasting growth of 3 percent or higher for the second, third, and fourth quarters. The difference in the economic and the political trajectories would be huge.

We don’t know where the economy is going or what campaign developments will occur. All we know is that things are different than they were four months ago. Obama’s job-approval rating of 47 percent last week is higher than he has had since last summer, but there is no guarantee it will hold for the next month, let alone the next eight. People jumping to conclusions about this race do so at their peril.