Presidents and the Unemployment Rate

Elections tend to have themes. If the 2000 presidential election was about education, the 2004 election about national security, the 2008 election about Wall Street and health care reform, then the 2012 election will surely be about jobs, jobs, jobs.

How does unemployment affect the odds of being re-elected? There are all kinds of theories. Most point back to the classic line: "Are you better off than you were four years ago?"

Harvard historian Niall Ferguson wrote in his book The Cash Nexus:

A good illustration of this new economic determinism was the widespread explanation of the failure to impeach President Clinton for perjury and the obstruction of justice in connection with his numerous sexual misdemeanors. By February 1999 a majority of Americans believed Clinton was guilty of the charges against him, but only a small minority wanted him to resign as president. According to Senator Robert Byrd -- and many other commentators -- the explanation was simple: "No president will ever be removed when the economy is at record highs. People are voting with their wallets in answering polls."

On the contrary, Ferguson writes, in the year before Richard Nixon resigned in 1974 with approval ratings under 30%, "unemployment rose by almost 1 million and the inflation rate doubled ... on Wall Street the stock market fell by a third." Indeed, by 1974, the Dow Jones (INDEX: ^DJI  ) was in one of its worst slumps since the Great Depression. Clinton, on the other hand, enjoyed the greatest bull market in history.

Anyways, here's how the unemployment rate has worked out over the last nine presidential terms:

President

Unemployment Rate at Start of Term

Unemployment Rate at End of Term

Carter

7.5%

7.5%

Reagan (first term)

7.5%

7.3%

Reagan (second term)

7.3%

5.4%

G. H. W. Bush

5.4%

7.3%

Clinton ( first term)

7.3%

5.3%

Clinton (second term)

5.3%

4.2%

G. W. Bush (first term)

4.2%

5.3%

G. W. Bush (second term)

5.3%

7.8%

Obama

7.8%

8.1%*

Source: Bureau of Labor Statistics. *Through April 2012.

This doesn't look good for the current president. As The New York Times once noted, "No American president since Franklin Delano Roosevelt has won a second term in office when the unemployment rate on Election Day topped 7.2 percent." (Despite the numbers in the table, the quote still applies to Ronald Reagan in 1984, as the unemployment rate rose between Election Day and Inauguration Day.)

But statistician Nate Silver looked closer at the data going back to William Howard Taft in 1912 and found something surprising: There's virtually no correlation between the unemployment rate on Election Day and an incumbent's chance of winning. Even looking at the change in unemployment throughout an incumbent's term, the correlation was weak. Same if you narrowed it down to just the post-World War II period. Even if you are "more or less deliberately cherry-picking" the data, Silver wrote, the correlation between unemployment and presidential elections is elusive.

But here's what I find interesting: On Election Day 2008, the nationwide unemployment rate was 6.8%, yet according to Census Bureau data, just 3.5% of those who actually voted were unemployed at the time. And more than a fifth of those who voted came from a household with an annual income of more than $75,000 -- a significantly higher portion than the national average. It was virtually the same in the 2004 election. The nationwide unemployment rate was 5.4% on Election Day 2004, yet just 2.7% of those who voted were unemployed at the time.

The average voter in the last two elections, then, has not been representative of the broader economy. They've been in much better financial shape than the average American. That could help explain why there's such a low correlation between the unemployment rate and the odds of being re-elected. And if that pattern repeats during this November's election, then what seems obvious today -- that the election will be about jobs, jobs, jobs -- might not be quite right.

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (21) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 29, 2012, at 4:31 PM, SammyP1 wrote:

    It's not the absolute number, it's the trend.

  • Report this Comment On May 29, 2012, at 4:32 PM, TMFMorgan wrote:

    ^ As the article explains, even the trend of unemployment during a term is very weakly correlated with an incumbent's chances of winning.

  • Report this Comment On May 29, 2012, at 7:10 PM, xetn wrote:

    I think the debt, unfunded liabilities and the massive money creation that is much more important. At to the list the huge increase in government regulation increasing costs across the board making the unemployment rate a result.

    An interesting article on the Fed's money creation is here:

    http://mises.org/daily/6054/The-Bernanke-Bust

  • Report this Comment On May 29, 2012, at 9:08 PM, modeltim wrote:

    I think this is a crummy article.

  • Report this Comment On May 29, 2012, at 11:16 PM, Chontichajim wrote:

    Almost nobody looks at unemployment 4 years earlier, compares it to unemployment near election day and makes a decision based on that. We may however look at sentiment over the last few months before an election, what we expect over the next few months, and then make up our mind based on that.

  • Report this Comment On May 30, 2012, at 9:43 AM, divybuy wrote:

    You forget about the entitlements this prez has put in place to assure the votes of the unemploiyed and welfare state that we have become. the stimulus fed the union coffers to assure the votes. He assures the gay/lesbian marraige pact then immediately sends out requests for donation to their respective associations. The man has got to go for the country to get back on its feet.

  • Report this Comment On May 30, 2012, at 11:05 AM, kspes wrote:

    I searched through census data and couldn't find this. " On Election Day 2008, the nationwide unemployment rate was 6.8%, yet according to Census Bureau data, just 3.5% of those who actually voted were unemployed at the time." I suspect it is made up to give some sort of credence to the story.

  • Report this Comment On May 30, 2012, at 11:12 AM, TopAustrianFool wrote:

    "If the 2000 presidential election was about education, "

    and about surplus spending...

    Remember, Al Gore's paying of the national debt, and the SS "lock-box."

    You forgot 2010 mid-terms were about "Repeal Obamacare."

  • Report this Comment On May 30, 2012, at 11:15 AM, TMFMorgan wrote:

    kspes,

    Neat logic: Can't find paper => assume author is making stuff up.

    Here it is:

    http://www.census.gov/prod/2010pubs/p20-562.pdf

    Employment data on table 2.

  • Report this Comment On May 30, 2012, at 11:15 AM, TMFMorgan wrote:

    <<You forgot 2010 mid-terms were about "Repeal Obamacare.">>

    The 2010 election was not a presidential cycle.

  • Report this Comment On May 30, 2012, at 11:18 AM, TopAustrianFool wrote:

    "There's virtually no correlation between the unemployment rate on Election Day and an incumbent's chance of winning. Even looking at the change in unemployment throughout an incumbent's term, the correlation was weak. Same if you narrowed it down to just the post-World War II period. Even if you are "more or less deliberately cherry-picking" the data, Silver wrote, the correlation between unemployment and presidential elections is elusive."

    Hey Morgan, you must be releaived.

  • Report this Comment On May 30, 2012, at 11:19 AM, TopAustrianFool wrote:

    Yikes!

    ...must be relieved.

  • Report this Comment On May 30, 2012, at 12:57 PM, obga18 wrote:

    i hate when politics come up on sites i like to visit, puts a sour taste in my mouth..

  • Report this Comment On May 30, 2012, at 1:04 PM, TMFMorgan wrote:

    Sorry for the sour taste, obga18. For better or worse, it's hard to divorce politics from the macro economy, and the macro economy plays a large role in investment performance (2008-2009, for example), so these things do tie in together. I don't think there's anything wrong with being political in an investment forum; it's partisanship that should be avoided.

  • Report this Comment On May 31, 2012, at 11:28 AM, DS31 wrote:

    Morgan,

    I thought the participation rate in presidental elections is rarely above 50%. Wouldn't that suggest that the "cross section" of actual voters is much more likely to be representative of the broader economy? That is, if roughly 50% of the total unemployed are actually voting, then the "sample" is a fairly good representation of the "whole."

    Dan

  • Report this Comment On May 31, 2012, at 11:32 AM, TMFMorgan wrote:

    ^ A participation rate of less than 50% would suggest the possibility of the sample not being representative of the whole. Which, Census data shows, is exactly the case:

    http://www.census.gov/prod/2010pubs/p20-562.pdf

  • Report this Comment On May 31, 2012, at 1:22 PM, DS31 wrote:

    Thanks for the quick response, Morgan, and the link. After seeing the data, I should have said "the participation rate is rarely above 60%" instead of 50%. It's always good to have accurate data!

    That being said, in the 2008 presidential election, unemployed voters should have made up 4.32% of the total voters (if the total actual voters was completely representative of the entire voting age population). Instead, unemployed voters were ony 3.5% of the total voters (rather than 4.32%), but I'd argure that is still a "fairly good" representation of the whole (though not as good as I had initially thought).

    Regardless, you remain my favorite fool author.

    Thanks again,

    Dan

  • Report this Comment On May 31, 2012, at 1:26 PM, TMFMorgan wrote:

    <<That being said, in the 2008 presidential election, unemployed voters should have made up 4.32% of the total voters>>

    How so?

  • Report this Comment On May 31, 2012, at 1:29 PM, DS31 wrote:

    PS. In my initial comment:

    <<I thought the participation rate in presidental elections is rarely above 50%. Wouldn't that suggest that the "cross section" of actual voters is much more likely to be representative of the broader economy? That is, if roughly 50% of the total unemployed are actually voting, then the "sample" is a fairly good representation of the "whole.">>

    I meant...in this case in particular, not that, in general, a 50% participation rate would make something more likely to be representative. (Certainly any sample size smaller than the entire universe will always be more likely to NOT be representative of the whole.)

  • Report this Comment On May 31, 2012, at 1:40 PM, DS31 wrote:

    Morgan,

    <<How so?>>

    Where's the "delete my previous comment button!" To quote Fonzie..."I was Wrrrrr, Wrrrr, Wrrrrrong." You are correct.

    (Thanks for letting me realize it myself rather than pointing it out for the whole internet to see.)

    Dan

  • Report this Comment On June 09, 2012, at 4:38 AM, thidmark wrote:

    The 2008 election was NOT about health care reform. Where in the world did you come up with that?

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