Home Economy Americans’ economic confidence is returning. Will Biden benefit?

Americans’ economic confidence is returning. Will Biden benefit?

by SuperiorInvest

Low approval ratings and rock-bottom consumer confidence numbers have dogged President Biden for months, a worrying sign for the White House as the country enters a presidential election year. But recent data suggests the tide is beginning to turn.

By some measures, Americans feel more confident about the economy than they have in years. Preliminary data indicates that they increasingly expect inflation to continue to decline and believe that interest rates will soon moderate.

The return of optimism, if it persists, could bolster Biden’s chances as he seeks re-election, and spell trouble for former President Donald J. Trump, who is the favorite for the Republican nomination and has been criticizing the Democratic incumbent’s economy. record.

But political scientists, consumer confidence experts and economists said it was too early for Democrats to take a victory lap around the latest economic data and confidence figures. Many economic risks remain that could derail apparent progress. In fact, models that attempt to predict election results based on economic data currently point to a reversal in November.

“We’re still very early in the election cycle, from an economic factors perspective,” said Joanne Hsu, who heads one of the most cited sentiment indexes as director of consumer surveys at the University of Michigan. “Lots of things can happen”.

The University of Michigan’s preliminary survey in January showed an unexpected rise in consumer confidence: The index rose to its highest level since July 2021, before inflation spiked. While the confidence measure could be revised (and is still slightly below its long-term trend), it has been recovering rapidly across all age, income, education and geographic groups over the past two months.

Regaining confidence could help Biden, said Neil Dutta, an economist at Renaissance Macro, especially if consumer confidence continues to recover this year as he expects.

If sentiment simply held at current levels, he said, the simple historical relationship between consumer confidence readings and the share of votes in power would give Biden about 49 percent of the vote. But the labor market is strong, gas prices are moderate and the stock market just hit a new record, all of which could fuel further improvement.

Yale economist Ray Fair has for decades produced the most widely followed model of how economics influences election outcomes. His model uses hard economic data (growth and inflation) to predict votes. His latest update suggested Democrats face a 50-50 chance of winning the White House in November, and similar odds in the House.

Why is the race expected to be so close under this model at a time when economic growth is strong? It all comes down to inflation. Voters tend to have a long memory when it comes to price increases, Fair said. They think about how much prices have risen over a president’s term, not just the latest inflation reading.

That means that while prices have risen at what is historically a fairly normal pace over the past six months, voters are likely to remember 2022 and late 2021, when they were jumping rapidly.

“Voters are looking beyond that: The fact that the price level is higher than when Biden took office is what voters are seeing,” Fair said.

That said, Fair’s model suffered two big surprises in 2016 and 2020, when Trump performed worse than would have been predicted based on the state of the economy alone. So it’s possible that if that hurdle repeats itself — if there’s what Fair called a “negative Trump residue” — it could help Biden win a larger share of the vote even at higher prices. (But there is very little data to prove that possibility, Fair notes on his site.)

There are also many uncertainties about how consumer confidence and the broader economy will influence the election results this time. There’s no doubt that what’s happening with the economy will be important, said Michael Lewis-Beck, a political scientist at the University of Iowa.

“The role of the economy is as fundamental as it gets: it is like rivers flowing to the sea,” he said.

But Lewis-Beck noted that other factors — such as the sense of isolation that has dogged many people since the coronavirus and the fact that Trump is a former president who voters may view as a “quasi-incumbent” — could muddy the similarity between the economic data and electoral results.

Still, what happens with the economy over the next six months will likely influence how Americans will feel as voters head to the polls later this year.

If the economy slows, that could be bad for the White House. Months of higher interest rates from the Federal Reserve could begin to weigh on growth, for example, or geopolitical turmoil in the Middle East could drive up gas prices.

But most economists expect the Federal Reserve to begin cutting interest rates and the economy to gradually cool in 2024. Forecasters in a Bloomberg survey expect unemployment to rise about half a percentage point by the end of the year, and that inflation continues to slow. and that economic growth moderates but remains positive.

That mildly hopeful outlook may explain why the Biden administration is now talking about improving data on consumer confidence, which long seemed to lag behind improvement in the real economy. Biden highlighted the latest leap during a speech on Friday, saying “we have more to do,” while highlighting recent economic progress.

“People are looking at all this stuff,” Lewis-Beck said. If Biden wants to convince voters, “he should focus on the message, and I think that will eventually come.”

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