Election Collection: Does the Economy Pick the President?

It’s the economy stupid! These famous words were a central theme of Bill Clinton’s successful campaign against George H.W. Bush. While the Clinton campaign in 1992 was focused on the recession the U.S. was facing at the time, the performance of the economy has a more significant impact on politics than you might think. This can be shown through the relationship of the Misery Index and the incoming president.

The Misery Index was designed by Arthur Okun, one of President Lyndon Johnson’s advisers, in the 1960s. It is a simple addition equation; it is the sum of the unemployment rate and the rate of inflation. The idea for the index was based on an assumption by Okun that rising unemployment and high inflation, both signs of a deteriorating economy, create economic and social costs within the United States.

The relationship between the index and the winning president is surprisingly accurate. If the Misery Index has been trending up (i.e., inflation and/or unemployment has been rising) in the last year of a president’s term, the opposing party typically wins. If the index is down (i.e., inflation and/or unemployment has been declining) in the final year of a president’s term, the incumbent party wins. Since the 1960 election of Nixon versus Kennedy, this relationship has held true five out of seven times when the index was higher and six out of six times when the index was lower.

As you can imagine, the index has gone lower since President Obama has been in office. He came in during the financial crisis when the unemployment rate was around 7.8%. Since then the unemployment rate has improved significantly. When he first came into office the index equaled 7.83. It is now currently 5.92 (as of February 2016). The reason why there is not a larger difference between when he started and now is because unemployment was trending higher when he took office and didn’t peak until October, 2010. Additionally, inflation was essentially zero when he entered the Oval Office in 2009. Since then, the Federal Reserve has been implementing policies to reduce unemployment and raise inflation. Today’s Misery Index of 5.92 is the total of 4.9% unemployment and 1.02% inflation.

While the overall trend in Obama’s Presidency has been down, with the US economy near full employment, it may be hard for that part of the index to drop further. At the same time, the Federal Reserve is trying to push inflation up, potentially adding to the inflation aspect of the equation. This may lead to an increase of the Misery Index as we approach the election. Only time will tell if the index correctly predicts this election or not.

Unemployment and inflation data courtesy of St. Louis Fed. Misery Index illustration courtesy of Oppenheimer Funds as of 12/31/14. Past performance is not indicative of future results.