Bloomberg News

Obama Finding Election Cheer in Misery Index: Cutting Research

October 11, 2012

U.S. President Barack Obama

U.S. President Barack Obama waves after speaking during a campaign rally at the BankUnited Center at the University of Miami in Miami on October 11, 2012. Photgrapher: Joe Raedle/Getty Images

President Barack Obama should find happiness in the U.S. economy’s “Misery Index” -- as long as he focuses on its national reading rather than its state-by- state gauges.

The combination of unemployment and inflation was 9.7 percent in the third quarter, compared with 11.3 percent in the comparable quarter before the Democrat’s 2008 victory, calculated Carl Riccadonna, a senior economist at Deutsche Bank AG (DBK) in New York. That suggests a “narrow re-election” for Obama next month over Republican challenger Mitt Romney, Riccadonna said in an Oct. 5 report.

The misery index was developed in the 1970s by American economist Arthur Okun, who added unemployment and consumer-price inflation together to grade the state of the economy. In the most recent quarter, U.S. unemployment was 8.1 percent and inflation 1.6 percent, Deutsche Bank says.

A decline over a four-year presidential term suggests re- election for the incumbent or his party’s candidate, according to Riccadonna. The index has predicted nine of the past 12 elections and was only marginally off when it failed to forecast George W. Bush’s re-election in 2004, he found. If the threshold for the index is raised to a full percentage-point move over the term it was accurate every election.

The picture is less clear when Riccadonna allows for the importance of the Electoral College, which determines the winner based on how each state votes. Assuming that the results in 13 states, many of them so-called swing states, are hard to call, and using the most recent state data for the second quarter, he calculated an average misery index for those states of 9.5 percent. That compares with a national average of 10.1 percent.

If votes are apportioned according to the level of the index and only those above the national average tilt to Romney, then Obama wins, Riccadonna said. The incumbent also stays in the White House even if the four states that are clearly worse off than four years ago favor the Republican.

Still, if all states with an index now above the 9.5 percent average back Romney, then he would secure the White House. The same happens if the states whose indexes are only marginally lower than four years ago unite with the worse-off ones.

* * *

Housing is typically more of a leader in U.S. economic recoveries than it is across other global markets.

Residential investment’s role as an early engine of growth seems to vary with differences in construction, according to a National Bureau of Economic Research paper this month by University of California Santa Barbara economists Finn Kydland, a 2004 Nobel laureate, and Peter Rupert. The study was coauthored by Roman Sustek of the University of Southampton in the U.K.

Building takes place faster in the U.S. than other markets, so the investment registered as part of gross domestic product is concentrated in an earlier period, the authors said.

The authors looked at housing starts and found the beginning of construction showed “much more uniformity” across Australia, Belgium, Canada,France and the U.S., according to the NBER paper. It’s after that that the differences emerge.

In the U.S., it takes about five or six months to build a home, the authors say, citing Census Bureau data. Across other countries, “longer completion times in residential construction make residential investment more coincident with GDP” rather than a leader.

Housing has been a laggard in the current expansion, with residential investment contributing an average of less than 0.1 percentage point to growth in the past three years.

* * *

Government spending reductions probably cut deeper than economists first estimated.

Olivier Blanchard, chief economist at the International Monetary Fund, and colleague Daniel Leigh argue that so-called fiscal multipliers used by analysts around the world to gauge how declines in government spending affect economic growth have “been systematically too low” in the past two years. The higher a fiscal multiplier, the more effect a budget retrenchment has on output.

Their findings, released on Oct. 9 as part of the Washington-based lender’s World Economic Outlook, help explain why economic projections for 28 countries didn’t capture the weak pace of growth that has occurred as countries reined in government spending.

To arrive at this conclusion, the economists examined the degree to which forecast errors in 2010 and 2011 could be explained by assumptions about spending. The forecasts, which came from the IMF, the Organization for Economic Cooperation and Development, the Economist Intelligence Unit and the European Commission, included members of the Group of 20 nations and the European Union.

A 1 percent reduction in government outlays could cut a nation’s GDP by 0.9 to 1.7 percentage points, according to their calculations. Earlier studies tended to assume such a reduction would trim GDP by only 0.5 point, the IMF economists found.

* * *

Europe’s youth unemployment rate may not be quite as bad as it first seems, according to JPMorgan Chase & Co. (JPM:US) and the Peterson Institute for International Economics.

While it may be the highest ever, JPMorgan Chase economist David Mackie and Jacob Kirkegaard of the Peterson Institute said in separate studies in the past week that the official 22.8 percent youth unemployment rate exaggerates the participation of that group in the labor market.

The rate is overblown because it’s based on the ratio of unemployed to the workforce. Because many young people are studying at that age, only 42 percent of that population is in the workforce, according to Mackie, JPMorgan’s London-based chief European economist, in an Oct 5. report. Fifty-two percent are in education.

Using 2011 data and reclassifying those in education as employed, Mackie suggests the European youth jobless rate was about 9.4 percent last year rather than the official 20.8 percent. He and Kirkegaard suggest a better gauge is the so- called NEET rate, which measures those young individuals not in employment, education or training. It was 12.6 percent last year.

“By this metric, the euro area is actually performing better in the aggregate than the U.S., and even the supposedly desperate periphery only has NEET rates a few percentage points higher than the U.S.” Kirkegaard said in an Oct. 5 study. “Youth dropping out of the workforce in a recession is not necessarily such a bad thing for them or the nation if they leave low skilled work to return to education.”

* * *

African markets may offer the promise of strong economic growth absent elsewhere in the world economy, according to Standard Bank Group.

Ten of the 25 fastest expanding economies in the next five years will be in Africa, where the combined gross domestic product is comparable to that of Brazil or Russia, projected Goolam Ballim, group chief economist in Johannesburg, in a presentation in Tokyo yesterday.

Africa’s population is increasingly youthful in contrast to the aging workforce in developed economies, while the continent’s growth in private consumption lags behind only China and Japan, he said. Two in three Africans probably will be living in cities by 2050, while Africa’s resource potential remains largely dormant and financial services are growing.

Since May, Standard Bank’s index of 10 African currencies has outperformed its gauge of 10 emerging market exchange rates, Ballim said.

To contact the reporters on this story: Simon Kennedy in Tokyo at skennedy4@bloomberg.net, Alex Kowalski in Washington at akowalski13@bloomberg.net, Steve Matthews in Atlanta at smatthews@bloomberg.net.

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net. Chris Wellisz at cwellisz@bloomberg.net


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