Rising Incomes May Help Democrats Avert 2010 Election Debacle
They arent.
Personal disposable income, which has dropped in seven of the last 12 months, is forecast to begin growing steadily by early this fall, and it counts more than unemployment when voters go to the polls, research shows. Gross domestic product is also predicted to edge up by 0.5 percent in the three months ending September, after contracting in the past three quarters, and continue improving in the fourth quarter and next year.
“If economic growth picks up reasonably well starting in the first quarter of 2010, then that would be a plus for the Democrats in Congress,” says Ray Fair, a Yale University economist whose forecasting model has called the top vote-getter in the last three presidential races.
Since 1945, the party that controls the White House has lost an average of 16 seats in the House of Representatives in a presidents first midterm election, according to the nonpartisan Cook Political Report. Recessions have made the damage worse, as former President Ronald Reagan learned in 1982, when an election-year slump cost Republicans a net 26 representatives, erasing gains the party made two years earlier.
Democrats currently control 59 seats in the 100-member Senate and have a 256-to-178 margin in the House. A Republican gain of 40 seats there would swing the majority to the opposition and present President Barack Obama with a major obstacle.
Credit or Blame
“Its the party in power that gets either the credit or the blame” for the economy, says Texas Senator John Cornyn, chair of the National Republican Senatorial Committee campaign group. “I think theres going to be significant opportunities for us to have a referendum on the Obama administration.”
While unemployment affects voter sentiment in presidential and congressional elections, the growth of personal income has the highest correlation of all economic data with the fate of the party that controls the White House, says Douglas Hibbs, a retired Massachusetts Institute of Technology economics professor.
Thats because personal income is the best measure of changes in voters economic well-being, he says his research shows. Income fell 0.06 percent in March and 0.09 percent for all of 2008, adjusted for inflation, according to the Commerce Department.
Bread and Peace
Income is one of two variables in an election-prediction model Hibbs developed called Bread and Peace. The other is U.S. casualties in undeclared foreign wars, which he says likely wont affect the congressional races.
Personal-income growth moves in tandem with GDP growth, “and it should turn up sometime around the summer or early fall of 2009,” says Lakshman Achuthan, managing director of the Economic Cycle Research Institute in New York. St. Louis-based Macroeconomic Advisers LLC forecasts disposable personal income per capita will rise 1.1 percent this year and 1.3 percent in 2010.
GDP, the broadest measure of the economy, will expand 0.5 percent in the third quarter of this year, according to a Bloomberg survey of 61 economists, and grow at a pace of 1.9 percent in 2010. GDP fell at a 6.1 percent annual rate in the first quarter, after contracting 6.3 percent in the last three months of 2008.
Confident Consumers
Consumer confidence is improving, portending growth in consumption, which represents two-thirds of the economy. The Reuters/University of Michigan preliminary index of consumer sentiment rose to 67.9 in May from 65.1 in April — the highest since before last years credit-market collapse.
A drop in inventories is setting up manufacturers for a burst of production. Industrial output decreased 0.5 percent last month, the smallest drop since October, signaling the recessions grip is loosening. Stock prices are surging; the Dow Jones Industrial Average is up about 26 percent since March 9.
“If the economy sticks to the script laid out by the consensus view, that would have real disposable income turning up prior to the election,” says Mark Zandi, chief economist at Moodys Economy.com.
Rising Unemployment