Disposable income is where politics, economy meet
Once upon a time, the presidential-election campaign began in earnest after Labor Day. But as we now know all too well, the campaign is well under way with Democrats and Republicans already slinging mud at each other.
So, who is going to win in November, President Bush or Sen. John Kerry?
I like to look at real disposable income to predict the outcome. This economic indicator adds up all the money people in the country make, takes out inflation and taxes, and puts what's left into our collective pockets; it's essentially our spending money.
Going back to the 1960 election, each time real disposable income has risen at an annual rate of 3.8 percent or above in the months before an election, the incumbent or his party wins the election. Anything below that, and it has been generally good for the challenger.
For example, in two of the largest landslide victories by incumbents (Lyndon Johnson in 1964 and Richard Nixon in 1972), real disposable income grew in excess of 6 percent in the 12 months before the election.
The worst defeat for an incumbent occurred when Jimmy Carter lost in 1980 to Ronald Reagan. Real disposable income had fallen 0.8 percent in the year before the election.
In 1968, real disposable income grew at 3.8 percent, at the too-close-to-call figure. That year's contest between Hubert Humphrey (the Democrats were the incumbent party) and Nixon was one of the closest in U.S. history.
In 2000, real disposable income was growing at a 3.5 percent rate. The result? Al Gore (the Democrats were the incumbent party) runs a close race but loses to George W. Bush by a hanging chad, although the role of third-party candidate Ralph Nader complicates things.
The index isn't absolute or foolproof. In 1996, disposable income was rising at about an annual rate of 3.4 percent. That should have meant President Clinton would have lost a close election to Sen. Bob Dole. But Clinton won in a landslide.
Another possible problem is a disconnect between income and spare cash in our pockets. Real disposable has increased over the past year. But that increase is almost solely because of last year's tax cuts. Hourly wages, also adjusted for inflation, have declined over the past year.
The Bureau of Economic Analysis, the government's keeper of the numbers, said real disposable income in May was 3.766 percent ahead of where it was last May. How close can you get to that crucial 3.8 percent level?
What gets really interesting is the quarter-by-quarter look at real disposable income. Global Insight puts the figures at 5 percent in the first quarter, 2.6 percent for the second quarter, 2.2 percent in the third quarter and 4 percent in the fourth quarter.
Hmmm. Real disposable income will be growing at a much slower rate now than at election time.
If the current months are crucial to how people vote in November, things are looking good for the Kerry-Edwards ticket. But if voters are beginning to feel that increase in disposable income as they go to the polls in November, it could be good for the Bush team. Nader is in the race again, and again his role will be hard to measure.
If Global Insight is right, the election will be very close, but the Kerry-Edwards ticket should pull out a close victory. You heard it here first.
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