10:37 a.m. Friday | Updated On Friday morning, the Labor Department announced that the economy added 243,000 jobs in January and an average of 201,000 jobs over the last three months.
The unemployment report on Friday will give us the most tangible read to date on how the economy is performing in 2012. It might also represent the most important number yet for President Obama’s prospects of winning re-election.
Here’s a spoiler: reports that say more than 150,000 jobs have been created can generally be interpreted as good news for Mr. Obama. Reports that come in at under 150,000 jobs could put him on a trajectory toward defeat.
However, the matter is worth examining in more depth.
No economic indicator is the holy grail. The American economy is a hard thing to measure, and initial estimates of economic performance are subject to significant revisions. Different aspects of the economy affect different people in different ways (the political science literature on exactly how economic performance affects voter behavior comes to some diverse conclusions). And there are a number of non-economic variables pertinent to predicting presidential elections — wars, candidate quality and ideology, turnout, scandals and so forth.
But if you want to focus a single economic indicator, job growth during the presidential election year — especially as measured by the series called nonfarm payrolls — has a lot going for it.
For one thing, data related to the change in the level of employment have had among the highest correlations with electoral performance in the past. The correlations aren’t perfect by any means. But if you perform a true apples-to-apples comparison (that is, looking at the economic indicators alone rather than muddying them with other sorts of extraneous variables), they do at least as well as anything else in predicting elections, and slightly better than some other commonly used metrics.
Just as important, there are a lot of qualitative reasons to focus on the jobs numbers. They measure something tangible and important. They receive much attention from economists, investors, political campaigns and the news media, and therefore inform the public discussion. They are released every month after only a minimal lag. They are subject to revision, and the revisions can be significant, but they aren’t quite as bad as those for other economic series like G.D.P. or personal income growth. The jobs numbers are calculated in a comparatively straightforward way, and are usually in pretty good alignment with other economic measures. They don’t need to be adjusted for inflation.
These qualitative factors are important because a sample size of 16 elections since World War II is insufficient to provide for persuasive statistical evidence as to which economic indicators (from among dozens or hundreds of credible candidates) are really best for predicting election outcomes in the long-run. Still, that the statistical relationship between job growth and re-election has been comparatively good in the past is reassuring.
In the table below, I’ve listed the annualized rate of payroll growth from January through October in the 16 presidential election years since World War II, then compared it to the margin of victory or defeat for the incumbent party.
Because these growth rates are not commonly reported, I’ve used a little algebra to translate them into something I call “equivalent monthly jobs.” This represents how many jobs would be added or subtracted per month using today’s figure of 131.9 million payroll jobs as a baseline.
In 1984 under Ronald Reagan, for instance, jobs grew at an annualized rate of 4.43 percent, which worked out to an average of 340,000 new jobs added per month from January through October. That’s already a very good figure. But it’s even better when you translate it into today’s terms, since the adult population is now larger. Were payroll jobs to grow at 4.43 percent this year, that would translate to about 487,000 new jobs per month. (With numbers like that, you might be able to win re-election against George Washington, let alone Walter Mondale.)
In the three election years where the economy was actually shedding jobs, the incumbent party lost — badly in 1980 and in 2008, and in a close election in 1960. And George H.W. Bush lost in 1992 when the rate of job growth was under 1 percent, below the rate of population growth.
Overall, the relationship between job growth and electoral performance is good but not great.
Roughly speaking, there were 10 election years in which you could make a pretty good prediction about the election outcome from knowing the jobs numbers alone: 1948, 1960, and then the eight elections from 1980 onward.
The year 1992 is something of a borderline case — job growth was sluggish enough that you might have expected a loss for Mr. Bush, but not necessarily a clear loss. Still, there were some other things going on that year — Bill Clinton was a highly skilled and relatively moderate candidate, Ross Perot was in the race and Republicans had held the White House for three consecutive terms.
In six other elections, you would have needed to look beyond the jobs numbers to come to a good prediction about the outcome.
In 1964 and 1972, Lyndon B. Johnson and Richard Nixon had strong jobs numbers and were clear favorites for re-election on that basis, but their huge margins of victory also came about in part because they were running against extremist opponents who had little appeal to swing voters.
In 1956, Dwight D. Eisenhower won an overwhelming victory despite the economic numbers being fairly average — perhaps a testament to his personal popularity, especially against a milquetoast Democratic opponent in Adlai Stevenson.
Meanwhile, there were three times that the incumbent party lost despite fairly strong jobs numbers. Gerald Ford was weighed down by Watergate and Richard Nixon’s resignation in 1976. Hubert Humphrey in 1968 was running in the shadow of Johnson, who had become unpopular amid an environment of racial tension and protests over the Vietnam War. Stevenson, in 1952, had a number of things working against him: Democrats had occupied the White House for five consecutive terms, the Korean War had become fairly unpopular and he was running against one of the strongest opponents ever in Eisenhower.
A bit of common sense, in other words, can usually explain these outliers. (I won’t go on another diatribe about this, but be wary of models that substitute data dredging for common sense.)
But what about Mr. Obama?
If Mitt Romney is the Republican nominee, it doesn’t seem as though the outcome is likely to be an outlier. Mr. Romney is, by most measures, a fairly average challenger — neither a bridge-building moderate like Eisenhower, nor someone far outside of the political mainstream like George McGovern.
Meanwhile, Mr. Obama has no major scandals or foreign policy debacles to deal with.
Yes, there are little things that could matter around the margin — for instance, an unmotivated Democratic or Republican base, or Mr. Romney’s mediocre favorability ratings. But those are things that might shift the outcome by a percentage point or two rather than producing a radical deviation from the economic fundamentals.
One way to estimate how many jobs Mr. Obama would need to create to win re-election is to look at the red regression line in the charts above. It crosses the horizontal axis at a figure of about 107,000 jobs per month.
What this means is that if we knew nothing else about the election but how many jobs were created between January and October 2012, we would deem Mr. Obama to be a favorite if the economy created more than 107,000 jobs per month and an underdog otherwise. Basically, this would represent job creation at about the rate of population growth.
However, there is no need for us to be so ignorant about some of the other evidence — and that evidence implies that Mr. Obama is not likely to get off quite so easily.
For one thing, we know that job creation was extremely poor during the first two years of Mr. Obama’s tenure in office, and mediocre during the third year. How much does that matter?
Actually, it may matter less than you might think. The public has tended to give greater weight to recent job growth, discounting earlier performance when the trajectory seems positive.
In fact, if you run a regression analysis that looks at the payroll growth rate in the fourth year of a president’s term alongside the rate in the first three years, the coefficient on the first three years is negative — seeming to imply that less job creation early in the term helps a president — although not to a statistically significant degree.
I would advise against taking this result too seriously. If you break it down in more detail, you’ll find that job growth during the third year of a president’s term has a positive effect on his re-election odds, while the coefficients attached to the first two years are negative.
But none of these results are statistically significant or particularly close to it; only job growth during the fourth year of a president’s term has a clear effect.
We can get much more sensible results if we account for a president’s approval rating. This allows us to see exactly what the public thinks about a president, rather than trying to reverse engineer that result through statistical means.
Mr. Obama’s approval rating is now 46.5 percent, according to the Real Clear Politics average.
That isn’t terrible — it’s in the range where Mr. Obama might be able to eke out a victory in the Electoral College — but it’s somewhat below average. From 1948 through 2008, the average president had an approval rating of 52 percent as of Feb. 1 of the election year, according to the Roper Center archives.
If Mr. Obama has an approval rating of 52 percent by November, he will almost certainly win re-election. He’d also be a favorite if he’s at 50 percent. And 48 percent or 49 percent might also do the trick, since at that point Mr. Obama’s approval rating would likely exceed his disapproval rating.
But Mr. Obama is not quite there yet. The surest way for him to improve his approval rating will be to create jobs at a rate that exceeds the rate of population growth.
We can come up with an estimate of just how many jobs this might be if we put a president’s approval rating as of Feb. 1 and the payrolls numbers into a regression equation.
I’ll spare you the math (although it is straightforward), but this works out to a break-even number of 166,000 jobs per month — not a huge number, but more than the 107,000 that we had estimated before accounting for Mr. Obama’s middling approval rating.
There are two other factors that are worth considering, one of which works for Mr. Obama and the other against him.
The favorable factor is that population growth is slower than at most points in the recent past, which puts somewhat less pressure on the job market. Specifically, the growth rate in the adult civilian population was about 0.9 percent in 2011, somewhat lower than the average of 1.3 percent since World War II.
To clarify, this reflects the growth rate in the adult population and not what the government defines as the labor force. I am not a fan of using calculations like the unemployment rate that rely on the definition of the labor force because entry and exit into the labor force can be counter-cyclical: more people exit the labor force when they perceive the economy to be weak, which “helps” a president given the way the unemployment rate is calculated, and vice versa. However, the growth in the adult population is relatively exogenous from economic performance and is probably worth considering.
The factor that works against Mr. Obama is a more detailed evaluation of his approval rating. Opinions about Mr. Obama are very polarized — his approval rating is 46.5 percent but his disapproval rating is 47.9 percent, according to Real Clear Politics. Very few people are undecided about Mr. Obama. (In contrast, Gerald Ford had an approval rating of 46 percent in Feb. 1976, but a disapproval rating of 40 percent — a lot of voters weren’t quite sure what to think about him.)
If you run another version of the analysis that considers a president’s net approval rating, along with the rate of payroll growth net of population growth, you come up with a break-even number of 151,000 jobs per month.
This is, in my view, a highly intuitive figure. When the payrolls number has come in below 150,000 jobs, most of the economists whose views I trust regard it is bad news. Above 150,000 jobs, and they regard it as a hopeful sign on balance.
What’s more, current forecasts of job growth are very close to that 150,000 jobs figure. Last month’s Wall Street Journal forecasting panel predicted payroll growth of 155,000 jobs per month through the end of 2012.
Economic forecasts are frankly pretty mediocre, so take that with a grain of salt. With that said, consensus forecasts are better than individual forecasts, and I am certainly not claiming that I could do any better myself.
I also do not mean to suggest that the jobs numbers are the only thing that will matter. If payrolls growth averages 175,000 per month, Mr. Obama will probably be a favorite, but not a prohibitive one. If it averages 125,000 per month, he will be a modest underdog.
Still, the current forecast for labor growth points toward an extremely close election — one in which every job above or below that 150,000 threshold could be critical.