Why the Fed Can't Doom Clinton's Chances
Economic forecasters for decades have predicted, with uncanny accuracy, the outcome of presidential elections by taking the temperature of the economy. They consider indicators like inflation and unemployment, but gross domestic product growth is usually the most important one.
Yale economist Ray Fair, the dean of such forecasters, in late July checked the variables in his model, which has picked the winner in all but two elections going back to 1916, and predicted a Donald Trump victory. According to Fair, Hillary Clinton can't win unless the economy is growing by at least 4 percent. It's now growing at an annual 1.2 percent pace. Among all the post-World War II recoveries, this one is dead last.
Of course, this isn't like any previous election year, with Trump's views and behavior so far outside the mainstream that economic fundamentals might not matter. Other prognosticators whose models also point to a Trump win have been skeptical of their models' chances of success this year.
Come Friday, however, Federal Reserve Chair Janet Yellen could move the needle. When she speaks at the Fed's annual Jackson Hole conference, she could drop hints of an imminent interest-rate increase. Several of her colleagues already have said as much.
The economy is "near full employment," and inflation is close to where the Fed wants it to be, Fed Vice Chairman Stanley Fischer said on Aug. 21. A few days earlier, New York Fed President William Dudley gently scolded markets for underestimating the likelihood of a tightening soon.
A rate increase would seem bad for Clinton and a windfall for Trump. In general, when consumers and companies must pay more to borrow, they do less of it and the economy slows down. When an incumbent president has held the office for two terms, voters also tend to want change. The economy, therefore, must be very strong to give his party's nominee a fighting chance.
But don't go thinking the Fed is about to hand the election to Trump. GDP growth may be sluggish, but other indicators show the economy is going gangbusters. Some examples:
- We learned on Tuesday that new-home sales in July were the highest in almost nine years. The Census Bureau reported the next day that existing home sales declined 3 percent from June to July, but that's probably because of a lack of new housing being built. And the number of underwater mortgages has declined to 12 percent -- about what it was in the late 1990s -- from more than 30 percent in 2012.
- Gasoline prices averaging about $2.15 a gallon are 20 percent lower than a year ago. The Energy Information Agency says pump prices could go below $2 in the fourth quarter. That will boost consumer confidence and provide a stimulus to the economy just as voters are headed to the polls.
- Unemployment is steady at 4.9 percent. The economy this year is adding 186,000 jobs a month on average and is luring some labor-force dropouts back to work.
- Wages are also rising, finally. Average hourly earnings are up 2.6 percent annually and, in some sectors, are increasing at the fastest rate since the recession. The competition for employees is heating up, forcing employers to pay more to attract better-trained workers.
- The stock market has recently surged, too. Sure, it's worrisome when share prices get too frothy, but opinion is decidedly mixed on whether the U.S. is reaching irrational exuberance levels. Meanwhile, those with retirement savings are seeing a nice jump in their 401(k) and IRA returns, which also adds to consumer confidence.
- Yes, GDP growth is disappointing at 1.2 percent, but that's pretty remarkable considering the slowdown in China, the everlasting stall in Japan, a possible post-Brexit recession in Britain and the European Union's lackluster performance.
Interest rates, meanwhile, are still at historically low levels. If Yellen signals that this might change as early as Sept. 21, when the Fed next meets to consider its interest-rate policy, it would mean the Fed is confident it can tighten a tad more. It would come nine months after the Fed last raised its key federal-funds rate a quarter-point to 0.5 percent, the first since 2006.
This doesn’t mean everything is dandy with the economy. The U.S. budget deficit is growing again, worker productivity is waning, and corporations are reluctant to invest in themselves. But for most voters, the answer to the question, "Are you better off now than you were last year," is yes. An interest-rate increase should be seen as a vote of confidence in the economy and a positive for the incumbent party. That's good news for Clinton.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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