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On The Trail: The economic indicator that could determine the midterm elections

Associated Press/Elaine Thompson

Democrats hoping to save their narrow majorities in the U.S. House and Senate in next year’s midterm elections are struggling to capitalize on strong economic indicators that point to one of the most robust recoveries in American history but that voters have mostly ignored.

While jobless rates are down and wages are up, Americans are becoming deeply pessimistic about the shape and direction of the economy. A recent poll conducted for the Wall Street Journal found just 30 percent of Americans believed the economy was headed in the right direction, and only 39 percent said it was excellent or good. 

Pollsters and economists say much of the pessimism stems from inflation, which has also reached heights not seen in recent decades. Two entire generations of Americans — the Millennial generation and Generation Z — are enduring the first real period of high inflation rates since they entered the workforce.

For those workers, the shock of a higher grocery bill or a pricier fill-up at the fuel pump is felt more deeply than the longer-term rise in wages and job opportunities.

And those numbers point to a worrying indicator for Congressional Democrats: The higher inflation rises, the lower the average American’s real disposable income.

And disposable income is a key indicator of electoral outcomes in both presidential and midterm elections.

Real disposable income is “resources that households have after the tax and transfers systems come into play,” said Josh Bivens, director of research at the Economic Policy Institute. “It’s a not-terrible bottom-line measure of how people are doing on average.” 

There are a hundred other factors that drive Americans’ voting decisions — a perception of rising crime, or the terror attacks of 2001, or the impeachment drive meant to oust then-President Clinton from office in 1998, Bivens said. But a president’s party faces real risks when Americans perceive their disposable income dropping. 

Since 1962, 18 national elections have taken place in an environment in which real disposable income has risen at a rate of less than 4 percent in the quarter preceding Election Day. Of those 18 elections, the president’s party has lost seats in all but three.

Conversely, a president’s party has gained seats in 12 elections over the same period. In those elections, real disposable income has grown an average of 4.7 percent in the three-month period before voters go to the polls. Democrats gained 37 seats in 1964 and Republicans gained a dozen seats in 1972 when the real disposable income marker rose by more than 7 percentage points; Republicans gained 16 seats in 1984 when the rate stood at 5.9 percentage points. 

“There really isn’t historically much correlation between unemployment or the stock market and political outcomes. There’s a very strong relationship between political outcomes and changes in real disposable incomes,” said Mark Mellman, the Democratic pollster. “It’s a notion everybody feels when they walk in the store and they pick up their wallets and they decide, can I afford this or not?”

The disconnect between figures that economists watch and public perception is stark: The unemployment rate in the United States has dropped almost 50 percent since the day President Biden took office. Unemployment claims are down to pre-pandemic levels, and the number of people filing first-time unemployment claims is at the lowest rate since the late 1960s.  

Wages are up, workers are optimistic about finding better jobs, and the stock market has set more record highs in Biden’s first eleven months in office than in the first year of former President Trump’s tenure.

But few Americans say they perceive a strong economy. And while partisan gaps in economic perception have grown in recent years — Republicans feel more optimistic when their party controls the White House and vice versa — those gaps have shrunk in the Biden era.

In a September report, the Pew Research Center found 16 percent of Republicans and 34 percent of Democrats said the economy was in excellent or good shape. That 18-point difference is half the 37-point gap that existed in the final year of Trump’s White House. 

Like many economic indicators, the coronavirus pandemic wreaked havoc with real disposable income statistics, as the charts seesawed wildly in the face of unprecedented lockdowns and stay-at-home orders. Disposable income jumped 12.5 percent in the second quarter of 2020, as the first round of coronavirus relief payments arrived in bank accounts, and 15.1 percent in the first quarter of 2021, when Biden signed the CARES Act. 

But in the months since, as direct payments have waned and inflation has begun to bite, real disposable incomes are down, 4.3 percent in the second quarter of the year and 0.9 percent in the third — well below the historical norm Democrats would need to maintain or add seats to their majorities.

“Since about may, real disposable income has been declining in this country. It’s partly a function of inflation, and it’s partly a function of the end of the first two tranches of Covid aid,” Mellman said. “That is going to mean trouble. Now the good news is we may get inflation under control.”

Many economists believe the current round of inflation is likely to resolve itself in the coming months — though how soon that takes place is uncertain. At a hearing before the Senate Banking Committee late last month, Federal Reserve chairman Jerome Powell said supply chain factors that have pushed inflation up are likely to “linger well into next year.”

Democrats say the Build Back Better climate and social spending bill will act to bring inflation under control, and that the bill’s job-creating elements will inject new optimism into the economy. 

But such a massive plan that spreads so far across economic sectors will take years to reverberate across such a wide swath of society. With an election looming less than a year away, and with negotiations between the White House and Sen. Joe Manchin (D-W.Va.) ongoing, Democrats have to hope that their legislative solution doesn’t come too late. 

“The real question is how much change is there and how much are people feeling?” Mellman said. “The speed with which people notice those [changes] depends in part on how steep the curve is.”

Tags Donald Trump Jerome Powell Joe Biden Joe Manchin

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