Unemployment and the Undecided

Thankfully, the home stretch has arrived: only a month remains in the (seemingly never-ending) 2012 election season. One more month of politicized, emotional economic rhetoric before the votes are cast. One more monthly deluge of political advertising. One more month of punditry debating who stuck their foot in their mouth and who didn’t, who was prepared to debate and who too tired. (Or lightheaded.) Friday, more campaign fodder was unveiled: The BLS reported the US headline unemployment rate fell to 7.8% in September.

No recent politician we’re aware of has chosen to campaign on a platform of being a “productivity creator” or a “comparative advantage streamliner,” but nearly every politician in modern times has sought to argue with their opponent over who’s more apt to create more and/or “better” jobs. As a result, many pundits and media believe the unemployment rate a make-or-break economic statistic as it pertains to electoral outcomes for the incumbent.

The Bureau of Labor Statistics’ report showed the rate declined from 8.1% in August to September’s 7.8%. Payrolls grew by 114,000 jobs, slightly less than analysts’ consensus forecasts. The broader U-6 rate—sometimes called the underemployment rate as it includes part-time workers seeking full-time work—didn’t move, remaining at 14.7%.

The BLS reported the dip wasn’t caused by a further reduction in labor force participation, as has occurred several times in recent years. The labor force grew. Rather, behind the decline in unemployment was the household survey showed 873,000 more people had jobs and 456,000 fewer folks were unemployed. In part, this could be just normal statistical volatility—the household survey is prone to huge swings and fairly large numbers (see Exhibit 1). Or perhaps sizable upward revisions to July and August hiring data explain the large upturn.

Exhibit 1: BLS Household Survey Change in Employment (in Thousands of Persons)

Source: Bureau of Labor Statistics.

Now, as we’ve often written, the unemployment rate perhaps has more forward-looking applications politically than economically. Yet realistically, most of its implications are in the arena of political rhetoric, not necessarily outcomes.

Throughout the past two years, many have opined the unemployment rate’s being elevated is somehow a factor that makes incumbent President Barack Obama the underdog, or at least, seriously hampers his reelection bid. At bare minimum, it’s fair to suggest the “job creator” rhetoric has been on overdrive—no small coincidence given higher than median or average unemployment.

But historically speaking, the notion such elevated unemployment has hampered or torpedoed incumbents’ efforts at reelection stands on rather shaky data. Since WWII, 2012 will be the eighth presidential election taking place with at or higher-than-average unemployment. Two (2008 and 1960) had no incumbent. In the other five for which the outcome is known (1972—when unemployment was at, not above, the US’s postwar median rate—1976, 1980, 1984 and 1992), the incumbent won twice and lost three times. A mixed bag. Add in the fact that one defeated incumbent was 1976’s Gerald Ford, who was never elected to national office, and the dataset is even murkier. All in all, what it seems the data truly shows is Ronald Reagan was a very adept campaigner—defeating Jimmy Carter while unemployment was 7.7%, then cruising to an easy reelection ... with a 7.4% unemployment rate. The long and short is there are too few data points to have much confidence in the conclusions, but the conclusions aren’t clearly tilted in favor of the incumbent or challenger anyway.

So which holds true this year, given unemployment at 7.8%—the highest mark in the postwar era this close to an election? Most polls seemingly allude to a tight race, and we see little reason to disagree at this juncture. That said, we’re fairly confident the unemployment rate doesn’t automatically zap the structural advantage an incumbent has historically had. In that respect, we’d suggest the onus is still on Mr. Romney to unseat President Obama. Of course, a month is an eternity in election time—plenty of time for an election-turning gaffe or an October surprise.

Our primary interest in politics is how results may or may not affect markets. And this year, regardless of whether Romney or Obama wins, history suggests the year will finish with fine returns. Both a Democrat’s reelection or a Republican’s initial election have brought above-average returns, and election years overall tend to be back-end loaded, suggesting a fine finish to 2012.