President Obama is currently flying high. Off the killing of Osama Bin Laden, Obama's approvals have risen into the low to mid 50's, and he leads all the major Republican challengers in the 2012 Presidential race. Unfortunately for the President, recent economic news suggests that this boost is nothing but a facade for what is shaping up to be a tough re-election fight. The Bureau of Economic Analysis (BEA) released new numbers on the state of the economy this past Friday, and they were much worse than expected. Many analysts will point to the lack of upward revision in Gross Domestic Product (GDP) and poor Unemployment as bad, but of far greater importance to President Obama's re-election hopes is the tumble in real disposable personal income per capita (RDPI). According to the BEA's prior April report, RDPI grew at 1.8% in the fourth quarter of 2010 over the preceding quarter and 2.9% in the first quarter of 2011. Last Friday, the BEA re-adjusted those numbers to 1.1% and 0.8%.
Why should the President be worried?
It turns out that weighted* quarterly growth in RDPI (along with three other already known variables* for the 2012 election) over the President's term can account for 92.9% of the variation in the incumbent party's percentage of the two-party vote in the 1952-2008 Presidential Elections.
To put this 92.8% of explanation into context, Chris Wlezien has shared with me Bob Erikson's and Wlezien's finding (in a must read upcoming book) that polls during the final week of the campaign during this same 1952-2008 stretch account for 93% of the variation in the incumbent party's share of the two-party vote.
In other words, both RDPI and the last minute polls will likely do a good job at predicting the final outcome in 2012.
Polls 300 days out from the election from this same time period, however, explain less than 5% of the outcome and will probably do a very poor job at predicting the final outcome 2012.
Thus, I believe it is more important to pay attention to RDPI prior and projected growth than polls at this point (far more than 300 days away from Election Day 2012) in the campaign.
We can estimate the RDPI growth the country will look back upon in the 2012 Presidential election by combining BEA reports from 2009 to the present with RDPI projections through 2012 from Wells Fargo.
With the new BEA numbers from last Friday, President Obama's term is predicted to be 12th out of 16 for weighted RDPI growth for Presidential terms beginning with Harry S. Truman's first full term.
According to my model, which has an in-dataset margin of error of 3.3% at 95% confidence, Obama is forecasted to win only 51.1% of the two-party vote. While Obama leads, his lead is definitely within any margin of error.
Predicting where the economy will turn is not an easy task. Otherwise, we probably would be able to avoid many economic crises. While it is possible that future RDPI growth will do better than Wells Fargo believes, I believe it is more likely to get worse.
Beyond the dire Drudge Report headlines, Wells Fargo's economic forecasts (which have tended to be far more pessimistic on other economic measures like GDP compared to the Philadelphia Fed's) have been overestimating RDPI growth for 2011.
Their January projection for first quarter of 2011 growth was 4.0% (against a 0.8% reality). Their January 2nd quarter of 2011 projection of growth was 3.5% and is now 1.0%; their 3rd quarter projection was 3.3% and is now 2.1%; and, their fourth quarter projection was 3.0% and is now 2.5%.
In other words, the 2011 economy is already doing worse that prognosticated. Any further dip in the economy, and President Obama might find those comparisons between the effect of capturing of Osama on his approval ratings and the effect of the Gulf War on H.W's Bush's hitting a little too close to home.
*Each successive quarter's economic growth is weighted more than the prior, so that final quarter's growth of a President's term is far more important than the first. See Douglas Hibbs for more details. *The three variables are fatalities in aggressive foreign wars started or continued for more than one term by the President's party, term of the Party of the President in the White House, and whether the President's party controls Congress. They are explained at length in a prior post.
My model is based off Douglas Hibbs' Bread and Piece model, which accounts for RDPI and fatalities. Plugging in the same forecasted RDPI growth into the original Hibbs' model finds President Obama garnering only 49.6% of the two-party vote!
The reason for this difference between models is my model's accounting for term of the Presidential party. When a party is in its first term in the White House, it has generally received a bonus.