4 economic outcomes that could cost Biden the election, “It’s the economy, stupid.” This iconic phrase coined by James Carville succinctly captured the essence of Bill Clinton’s unexpected triumph in 1992, marking the end of Democrats’ twelve-year hiatus from national prominence. Its relevance has endured through subsequent presidential elections.
However, the persistent shadow of what some term the “vibecession” hovering over Joe Biden as he gears up for a potential rematch with Donald Trump suggests a disconnect. Despite Biden’s insistence on highlighting positive economic indicators as evidence of his administration’s success, voters appear to perceive a struggling economy.
The economy has shown signs of recovery following the lingering challenges of the pandemic. Under Biden’s leadership, inflation has decreased from 9% in July 2022, while simultaneously maintaining the unemployment rate at a 54-year low.
This delicate balancing act has defied expectations, as economists initially anticipated that reducing inflation would necessitate an increase in unemployment. Gregory Daco, EY’s chief economist, has even described Biden’s economic approach as achieving the “holy grail of non-inflationary growth.”
As we approach November, the strength of the economy will undoubtedly become a focal point in the upcoming presidential election. Mark Zandi, chief economist at Moody’s Analytics, emphasized in an interview with Fortune that his team’s model predicts Biden’s reelection if the economy continues its positive trajectory.
Throughout Biden’s tenure, Zandi has remained optimistic about the economy. While his forecasts have been frequently cited by the Biden administration to validate their economic policies, Zandi maintains that he is not aligned with any political party. However, House Republicans have dubbed him “Biden’s favorite economic forecaster.”
The importance of perceptions
Zandi and his team at Moody’s have observed a shift in voter perception regarding the economy, as revealed in their analysis released in February. This aligns with the recent surge in consumer sentiment surveys, prompting notable economist Arindrajit Dube from the University of Massachusetts Amherst to comment on X: “The vibes are catching up with the hard data on the economy, and the Great Vibecession is looking increasingly … transitory.”
This marks a significant departure from 2023, when economists were perplexed by the electorate’s pessimism despite clear positive economic indicators. Presently, Americans’ outlook on the economy appears to be more in sync with the underlying data indicating a recovery.
According to Moody’s analysis, which assumes a rematch of 2020, Biden is poised for victory if the economy maintains its current trajectory.
However, according to Zandi, any shifts in the promising trajectory of the U.S. economy across four key indicators could result in Biden losing the election. Deterioration in these metrics could sway voters’ perceptions of the country’s economic health, leading to a loss of confidence in Biden’s leadership as president.
“When people assess the economy, they’re essentially asking themselves, ‘How am I faring today compared to some point in the past?'” explains Zandi.
Biden’s economic legacy is largely shaped by significant legislative achievements, including the Inflation Reduction Act and the CHIPS and Science Act. Conversely, Trump’s economic track record features substantial tax cuts and the dubious distinction of being the first president since Herbert Hoover to leave office with fewer jobs than when he assumed office.
Additionally, Trump has recently claimed credit for the ongoing stock market surge, attributing it to investors eagerly anticipating his reelection.
Moody’s analysis also factors in various political elements such as Biden’s approval ratings, the presence of third-party candidates, and, crucially, voter turnout, which could significantly influence the presidential race. However, if Moody’s predictions hold true, the presidential election will ultimately pivot on just a few percentage points, hinging primarily on four economic factors.
1 – It’s almost impossible to substitute gas when prices go up
According to Zandi and his team, a significant spike in gasoline prices could wreak havoc on the economy and jeopardize Biden’s chances of reelection. Gas prices carry significant weight in shaping voters’ perceptions of the economy due to their visibility and impact on everyday life, as highlighted by Brendan La Cerda, Moody’s director of economic research.
If gas prices surge by more than 2% year-over-year by the third quarter of 2024, Biden may face defeat, as projected by Moody’s analysis. With current regular gas prices at $3.15, a rise to over $3.94 by election day could potentially swing the vote in favor of Trump.
Gas prices serve as a crucial gauge of consumer confidence and spending power, primarily because there are no viable alternatives to filling up one’s gas tank. Unlike other essentials like groceries or heating bills, there’s limited flexibility to cut back on gas consumption.
As La Cerda notes, people tend to maintain a consistent level of gasoline usage, making it challenging to mitigate cost increases.
Zandi emphasizes that the timing of potential price hikes nearing election day could amplify their impact on voter sentiment.
2 – ‘There’s lots of emotions tied into homeownership’
Purchasing a home holds significant weight, akin to a once- or twice-in-a-lifetime event compared to everyday expenses like gas. According to La Cerda, Moody’s model focuses on 30-year mortgage rates rather than home appreciation rates as they better reflect affordability, a key concern this election cycle.
La Cerda emphasized the emotional significance tied to homeownership during a recent webinar. Moody’s projects that by election day, the 30-year fixed mortgage rate will be approximately 6.7%, down from the over 20-year high of nearly 8% in September.
A surge back to 8.65% could potentially impact the election outcome, but this scenario seems unlikely given the correlation between the surge in 2023 and the Fed’s interest rate adjustments.
First-time homebuyers, particularly millennials, attach profound importance to homeownership. Many fear being priced out of the market permanently, especially after facing the challenges of the Great Financial Crisis and the subsequent surge in home prices driven by the pandemic-induced remote work trend.
As the largest generation, millennials’ concerns about homeownership could sway the November election, particularly as Biden’s Democratic base skews younger.
Moody’s anticipates further declines in mortgage rates throughout the year, largely due to expectations of four interest rate cuts by the Federal Reserve by November. Despite Fed Chair Jerome Powell’s indication of three rate cuts, Zandi maintains his expectation of four cuts, which aligns with Moody’s analysis.
Trump’s criticism of Powell’s rate cuts, accusing him of favoring Biden’s reelection, corroborates this aspect of Moody’s analysis, albeit breaking the norm of central bank independence.
3 – Real household income: is my standard of living better or worse?
As the Federal Reserve mulls over potential rate cuts in response to subdued inflation, many Americans are still grappling with the burden of high prices, particularly evident at the grocery store.
Throughout 2021 and 2022, when inflation surged, people found themselves struggling as their paychecks failed to keep pace with the soaring costs, leaving them feeling financially stretched despite stagnant take-home pay.
Seeking to gauge the true impact of these inflationary pressures and the state of the labor market, Moody’s sought to examine not just the cost of specific essential goods, but whether Americans have sufficient funds in their bank accounts to afford them.
To capture this dynamic, Zandi’s model evaluates real personal income, which factors in total nominal income adjusted for inflation using the core consumer price index.
In a recent webinar, La Cerda emphasized the importance of assessing paycheck size relative to the cost of living, as it ultimately determines individuals’ standard of living. Looking ahead, Moody’s anticipates real disposable income to grow by approximately 0.7% by the third quarter of this year compared to the previous year.
There’s a widespread expectation that real incomes will see an uptick in 2024, primarily driven by declining inflation rates, resulting in wage growth outpacing price increases. Zandi predicts that if this trend persists, “people’s real incomes by election day will be meaningfully higher than when the President took office.”
However, the shift in real income required to alter Moody’s election forecast from a predicted win for Biden to one for Trump is substantial. For Trump to secure victory, real household incomes would need to decline by at least 3.8% compared to the roughly 1% growth Zandi anticipates.
This estimate falls within the range of other analysts’ expectations for household income growth, with Goldman Sachs projecting a 3% increase and the Conference Board forecasting flat real incomes for 2024, according to a November analyst note.
By the third quarter of 2023, the latest data available indicates that real incomes had grown by 1.7% compared to the same period in 2019, as reported by the Treasury Department. This marked improvement contrasts with the declines observed in 2021 and 2022, as highlighted by Census Bureau data showing a 2.3% decrease in real incomes.
Should the positive trends witnessed in 2023 persist, Americans would have experienced nearly two years of sustained real wage gains. Zandi emphasizes the critical role of this sustained improvement in real wages in shaping voter preferences, as individuals tend to base their decisions on future economic outlooks.
4 – Consumer confidence: perception is reality
When we look at real income gains, mortgage rates, and gas prices altogether, they give us a clearer picture of consumer confidence, even though it’s a bit of a fuzzy concept.
While it’s still important in gauging people’s perceptions of the economy, its role in determining presidential elections isn’t as significant as it used to be. According to Zandi, the extreme division in American politics has shifted consumer sentiment surveys from being indicators of confidence in the economy to more of a test of party loyalty.
“Perceptions definitely matter, and they’re heavily influenced by people’s political views,” Zandi commented last month.
However, despite this shift, Moody’s predicts that consumer confidence will remain steady for the rest of the year, which would favor a potential reelection for Biden. Yet, in the realm of politics, nothing speaks louder to voters than the actual economic conditions.
“The economy has to keep performing well,” Zandi emphasizes. “Otherwise, no matter what you say, it won’t make much of a difference.”
This article was originally published on Fortune.com.