Election Comes Down to: ‘Are You Better Off Now Than You Were Last Year?’

This article orinally appeared in MarketWatch. 

Every presidential election cycle brings out countless analysts, both expert and amateur. They examine the nuances of speeches, the details of policy positions, the images in advertising. No doubt these and other factors have a bearing on elections outcomes.

But to an economist, the elegant predictor of a presidential election outcome is GDP growth, or, more precisely, real GDP growth in an election year relative to the prior year. (Real gross domestic product takes into account changes in inflation or deflation.) In eight out of the past nine elections, if real GDP has improved in an election year relative to the prior year, the presidential party in power won. If real GDP growth slowed relative to the prior year, the party out of power took the White House.

Real GDP in 2015 is forecast to come in at just under 2%, depending on fourth-quarter GDP, due to be released Friday. The question for Republicans and Democrats is whether 2016 GDP growth will be lower or higher. Most people are forecasting a slowdown in GDP in 2016, which, if history is any guide, would imply a Republican victory.

Let’s look at the record of the past 35 years. In 1980, real GDP growth slowed from 3.2% in 1979 to minus 0.2%, a change of minus 3.4 percentage points. Ronald Reagan beat Jimmy Carter. In 1984, when GDP growth was 7.3%, 2.7 percentage points higher than the prior year, Reagan was reelected.

In 1988, George H.W. Bush was running against Michael Dukakis. Economic growth had improved by 0.7 percentage point over 1987, and Bush won the election.

The year 1992 is the one anomaly in the 35-year cycle. Economic growth improved by 3.7 percentage points, but Bush lost to Bill Clinton. There are a two explanations. First, GDP growth in 1992 was revised up substantially in 1993, so people may not have been fully aware of the improvement. Shortly after the election, in December 1992, the National Bureau of Economic Research declared that the recession had ended in March 1991. Second, a third candidate, Ross Perot, was running for president, and some think that he took votes away from Bush.

By 1996 economic growth was stronger than in 1995, and President Clinton was reelected. However, four years later, growth in 2000, while strong, was six-tenths of a percentage point less than in 1999, and George W. Bush beat Al Gore.

Growth in 2004 was a full percentage point higher than in 2003, and Bush was re-elected.

In 2008, growth was over 2 percentage points lower than in 2007, and President Obama was elected to office. He kept the White House in 2012 with economic growth six-tenths of a percentage point higher than in 2011.

GDP growth shows a greater amount of correlation than the stock market. With stock market measures, changes in value in the month before the election can trump annual changes. For instance, in 1980, when Reagan took the White House from Carter, the stock market was down 0.85% in the month prior to the election, but up by 12% during the year preceding the election. In 2012, President Obama retained office under similar stock market circumstances: The market was down by 2.5% the prior month, but up by 7% during the year.

GDP provides a measure of the economic activity in the entire economy. It is not surprising that growth in GDP would provide a good indicator of voter sentiment between the two main political parties. GDP is a rough measure of the answer to Ronald Reagan’s famous question in a 1980 debate: “Ask yourself, ‘Are you better off now than you were four years ago?’ ”

It turns out, the question need not have referred to four years but merely one year. That is, in 2016 a candidate can ask: “Are you better off now than you were last year?” Democratic Party candidates hope the answer is “yes.” Republicans contenders expect voters will have the opposite response.