Monday, July 25, 2016

Forecasting the 2016 election economy: the "Bread and Peace" model says . . .

 - by New Deal democrat

About a year ago, I started a series wherein I made use of various leading indicators to forecast the economy as it would exist leading up to Election Day.  Various economic measures have been used, including:
  • Douglas Hibbs' "Bread and Peace" model
  • Nate Silver's highest correlated economic data
  • Real aggregate wage growth
  • GDP (really, whether or not there is a recession) in Q3 of the election year
  • The Index of Leading Indicators through Q1 of the election year
Rather than discuss all of these in one gargantuan post, let me discuss each in turn.

Today, let's see what the "Bread and Peace" model forecasts.  This model singularly focuses on real disposable personal income per capita, and overweights each quarter closest to election day, through the quarter we are in now.  Here's what I concluded then:

"We don't know what it's values will be for the next year.  What we can say is that, *IF* real disposable personal income per capita continues to grow at the average rate it has since the beginning of 2013, it will be approximately +8.6% on election day, and the "Bread and Peace" model will favor a Democratic victory with the nominee receiving somewhere on the order of 53%-54% of the vote."

In fact, in 2012, Hibbs called for Obama to only receive about 47% of the vote.  After the election, the data was revised to show a surge in Q2 and Q3 of 2012, which was close to Obama's actual vote.  Here's real disposable personal income per capita for Obama's first term:

And here is the final result of Hibbs' model:

In general for the incumbent party's candidate to win, we would want to see real disposable personal income per capita growing at a rate in excess of 1% per year, and especially in the final year.  Here's what the graph looks like through May, normed to 100 as of Q1 2013:

The good news for Democrats is that real disposable personal income per capita has been increasing at a fairly steady clip of about 2% per year during Obama's 2nd term, and is currently up about 7.5%.. Should it continue to grow for one more quarter at a similar clip, that will put it at 8%, forecasting a lopsided Hillary Clinton victory.

There is a fly in the interpretation ointment, though.  The budget deal in 2011 temporarily decreased Social Security withholding through 2012, meaning that real disposable personal income rose strongly in 2012 -- and then plunged in January 2013.  If we use Q2 2012 as our starting point, then real disposable personal income has only risen about 4% in the lsat 4 years -- calling for a result no better tha Obama's 2012 victory and actually closer to a dead heat.